Will Jerome Powell Be Hawkish Or Dovish? How These 5 ETFs Could React To The Fed's Rate Decision Wednesday

Zinger Key Points
  • The Fed's hawkish or dovish stance could impact the US dollar, treasuries, gold, growth stocks, and market volatility.
  • Growth stocks in tech, communication services and consumer discretionary are vulnerable to Fed's aggressive inflation stance.
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Investors are on standby for the Federal Open Market Committee (FOMC) meeting’s interest rate decision, due to be announced on Wednesday, July 26, at 2:00 p.m. ET.

While the market has already fully priced in a 25-basis-point rate hike to a target range of 5.25%-5.5%, the Fed’s communications regarding future moves are expected to have a significant impact.

A more hawkish attitude from Fed Chair Jerome Powell, who may reaffirm the need for more hikes during his news conference, would likely catch markets off guard.

A more dovish Fed stance, indicating that current interest rates are appropriately high and that future adjustments will be based on economic data, on the other hand, might solidify existing market expectations on the end of tightening in July.

Here are the five major ETFs that are likely to see significant activity and shifts in reaction to the Fed interest rate decision:

1) Invesco DB USD Index Bullish Fund ETF UUP

The largest exchange-traded fund (ETF) tracking the performance of the U.S. dollar index (DXY) is likely to witness immediate reactions following the Fed meeting.

A Federal Reserve leaning towards a more hawkish stance, maintaining a stringent approach against inflation despite recent declines and signaling a potential rate hike in September, is likely to significantly bolster the U.S. currency.

The dollar bulls, on the other hand, would suffer a serious defeat if the Federal Reserve becomes more dovish and signals the end of policy tightening. 

The dollar is on course to post 6 consecutive positive sessions leading up to the Fed meeting, a stretch not seen since May 2022. The UUP ETF, on the other hand, is flat year to date and down 0.7% from a month ago.

Also Read: You Have ‘Zero Chance’ Of Getting Hired If This Is On Your Resume, Says Former Google Recruiter

Chart: Invesco DB USD Index Bullish Fund ETF Price Action In 2023

2) iShares 20+ Year Treasury Bond ETF TLT

The iShares 20+ Year Treasury Bond ETF (TLT) is particularly sensitive to interest rate changes and the Federal Reserve’s policy stance. Because it tracks long-dated U.S. Treasury bonds with a remaining maturity of at least 20 years, small changes in yields have a substantial influence on the ETF’s value due to its elevated duration.

A more hawkish Fed, implying a more aggressive approach to inflation and future rate hikes, poses troubles for long-term bonds. A more dovish Federal Reserve, which recognizes the risk of growth issues and minimizes inflation risks, tends to push down long-term bond yields, which boosts the value of the ETF.

As of July 25, the TLT ETF is broadly flat year to date, with a more significant drop of roughly 5% in the previous three months, as long-term Treasury yields recently surged.

Chart: iShares 20+ Year Treasury Bond ETF Price Action In 2023

3) SPDR Gold Trust GLD

Gold investors are very concerned about the Federal Reserve’s interest rate decisions and potential future actions. Interest rates and Treasury yields have a substantial impact on the value of precious metals.

A hawkish Fed, which raises interest rates and provokes the surge in Treasury yields, puts downward pressure on gold prices, and vice versa.

The GLD ETF has returned a positive 6.1% year to date. However, it has dropped 2% in the last three months as yields have recovered.

4) iShares Russell 1000 Growth ETF IWF

Growth stocks have demonstrated greater sensitivity to Federal Reserve meetings. Stocks with high valuations and optimistic growth expectations could be in jeopardy if the Fed shows an aggressive posture towards inflation by enacting further interest rate hikes this year.

Companies taking on riskier, potentially more lucrative long-term projects face higher financing costs as a result of higher interest rates. Growth stocks, on the other hand, may benefit from the expectation of future rate drops.

Growth stocks have experienced a surge in 2023, climbing 32% so far this year, primarily due to the rally driven by advancements in AI and progress in sectors such as technology, communication services, and consumer discretionary.

Chart: iShares Russell 1000 Growth ETF Price Action in 2023

5) ProShares Trust VIX Short-Term Futures ETF VIXY

Volatility in the stock market, as measured by the VIX index, has experienced a significant decline since the last quarter of the previous year. The fear index has not only returned to pre-pandemic lows but has also endured nine negative months out of the last 10, currently maintaining a 5-month losing streak.

The volatility index has seen a decrease of 59.2% since the start of the year. It’s natural to question whether the Federal Reserve has the ability to alter this trajectory. The answer largely depends on the actual impact of the upcoming event.

The VIX may experience an uptick if the Fed signals intentions to hike interest rates more aggressively and speed up quantitative tightening, both of which could trigger market instability. As the Fed’s decision unfolds, investors are closely monitoring the VIXY ETF.

Chart: ProShares Trust VIX Short-Term Futures ETF Price Action in 2023

Now read: Top Wall Street Strategist Warns Of Possible Market Bubble, Points To Tech Concentration In S&P 500 And AI Hype

Photo: International Monetary Fund on Flickr and Shutterstock

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Posted In: Macro Economic EventsBondsBroad U.S. Equity ETFsSpecialty ETFsCurrency ETFsTreasuriesEconomicsFederal ReservebondsdollarETFsFedFOMCFOMC MeetingGrowth stocksInterest RatesPowellVolatility
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