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The Federal Reserve is widely anticipated to cut interest rates at its upcoming Federal Open Market Committee meeting, with the decision set for release on Wednesday at 2 p.m. ET.
The central bank has maintained the federal funds rate at 5.25%-5.5% since September 2023 and this week’s rate reduction would be the first since March 2020, signaling a marked shift from the restrictive monetary policy stance implemented to combat soaring inflation.
The key question on everyone’s mind is the magnitude of the rate cut. Will the Fed opt for a cautious 25-basis-point reduction, or will it make a bolder move with a 50-basis-point cut, as seen at the start of previous rate-cutting cycles?
Market sentiment currently differs from Wall Street economist consensus. Traders are pricing in a 63% probability of a 50-basis-point cut, as per the CME FedWatch tool.
Among Wall Street analysts, instead, there is an overwhelming consensus on a more conservative 25-basis-point reduction, but JPMorgan Chase & Co. stands out as the notable exception, forecasting a 50-basis-point cut.
According to the biggest U.S. bank, interest rates are about 150 basis points above neutral levels. Therefore, a 25-basis-point cut per meeting would take almost a year to align the policy back to a neutral stance.
This strengthens the case for frontloading rate cuts at the start of the cycle, particularly given that, in hindsight, a July commencement might have been more appropriate.
Regardless of whether the Fed chooses a 25 or 50-basis-point reduction, analysts expect a series of cuts to continue through 2024 and 2025.
In the week leading up to this highly anticipated rate cut, investors reshuffled their portfolios, resulting in significant inflows into various exchange-traded funds (ETFs) that may indicate a strategic tilt toward assets poised to benefit from a lower interest rate environment.
To identify these trends, Benzinga analyzed data from VettaFi’s etfdb.com, and found that investors displayed a strong preference for value-oriented ETFs.
Notable among these were the iShares MSCI EAFE Value ETF (NYSE:EFV) and SPDR Portfolio S&P 500 Value ETF (NYSE:SPYV), signaling a tilt towards assets that may offer stability and a defensive hedge as the macro regime shifts.
As a traditional beneficiary of lower interest rates, gold has also been on investors’ radar, with prices repeatedly hitting record highs over the last week, supported by strong inflows into the SPDR Gold Shares (NYSE:GLD).
Also worth noting is the interest in the tech sector, particularly semiconductors, with the VanEck Semiconductor ETF (NYSE:SMH) seeing substantial inflows.
Additionally, investors pursued speculative and leveraged strategies on the Nasdaq 100, likely interpreted as a bet to the rising chance of a larger 50-basis-point cut.
Investors bought into both ProShares Ultra QQQ (NYSE:QLD), which aims to deliver twice the daily performance of the Nasdaq 100, and the ProShares UltraPro QQQ (NYSE:TQQQ), which targets three times the daily performance of the index.
Rounding out the list, the popular small-cap fund iShares Russell 2000 ETF (NYSE:IWM) attracted over half a billion dollars in inflows last week, signaling investors’ growing interest in smaller, domestically-focused companies as they are poised to benefit from declining borrowing costs.
| ETF Name | 1 Week Inflows ($MM) |
|---|---|
| iShares MSCI EAFE Value ETF | $1,135.48 |
| SPDR Portfolio S&P 500 ETF (NYSE:SPLG) | $820.85 |
| Vanguard Intermediate-Term Corporate Bond ETF (NYSE:VCIT) | $818.30 |
| SPDR Portfolio S&P 500 Value ETF | $775.06 |
| VanEck Semiconductor ETF | $717.11 |
| Vanguard S&P 500 ETF (NYSE:VOO) | $698.27 |
| SPDR Gold Shares | $648.41 |
| ProShares Ultra QQQ | $646.66 |
| ProShares UltraPro QQQ | $560.15 |
| iShares Russell 2000 ETF | $552.24 |
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Image created using artificial intelligence via Midjourney.
