Podcast: Fed Holds & Hints 3 Cuts to Come
As expected, the U.S. Federal Reserve left its key interest rate unchanged for the fifth consecutive time, while maintaining cuts are likely still to come. In today’s episode, Portfolio Managers Winnie Jiang, Chris Heakes, and your host, Erika Toth, break down the latest announcement. They also discuss the path to rate normalization, alternatives to HISA ETFs, and Energy.
Erika Toth is a Director of ETF Distribution at BMO ETFs. She is joined on the podcast by Winnie Jiang and Chris Heakes, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, March 20, 2024.
Episode Summary
Federal Reserve Policy Announcement
Since the Federal Reserves’ last policy meeting, inflation and labor market data have generally tracked above expectations. The question now is, is this is a new trend and are we stuck with higher for longer interest rates and stickier inflation. The US central bank left the overnight policy rate range unchanged at 23 year high at 5.25 to 5.5%. They maintained their outlook for three quarter point cuts this year. It may be a bumpy ride towards the 2% target inflation. For investors looking to park cash until there is more clarity on the timing of the pivot, they can consider BMO Money Market Fund ETF Series (Ticker: ZMMK).
Equity Market Rally
The Fed did not take rate cuts off the table and that is exactly what equity investors were looking for. Jerome Powell mentioned the Fed was becoming more confident that inflation is coming back to the 2% target and the job market is coming back to a better balance. He also mentioned the economy has been resilient, and forecasted 2.1% GDP growth for this year, and 2% next year. Typically, when equities sell off, the US dollar gains in value, so the currency can act as a built-in hedge. So for investors looking for US equity exposure but have some concerns, BMO S&P 500 Index ETF (Ticker: ZSP) can provide that US dollar exposure.
HISA ETFs
We think rates may stay higher for longer. In environment like this investor portfolio’s typically tilt towards more short-term cash like vehicles, like money markets and GICs. Due to changes in OFSI rules surrounding HISA ETFs, they are no longer yielding premiums to overnight rates and investors might start looking for better alternatives. One of them could be money market ETFs like BMO Money Market Fund ETF Series (Ticker: ZMMK). Or BMO Ultra Short-Term Bond ETF (Ticker: ZST) for a more credit focused product.
Energy Sector
The International Energy Agency is projecting that global oil demand is going to rise while oil supply is going to fall this year. OPEC may orchestrate production cuts to increase prices and profitability. There has also been an under investment from oil companies due to ESG reasons and the uncertainty around regulations. A strategy that can work in this case is the BMO Covered Call Energy ETF ZWEN (Ticker: ZWEN). It holds the largest energy companies trading in North America with a covered call overlay to provide an additional yield on top of the dividend income stream. This can help mitigate some volatility associated with the sector.
ZMMK, total returns as at 2024/02/29: 1yr: 5.08%, 2yr: 3.87%, SI: 3.45%
ZST, total returns as at 2024/02/29: 1yr: 5.37%, 3yr: 2.53%, 5yr: 2.26%, 10yr: 1.88%, SI: 1.95%
ZEO, total returns as at 2024/02/29: 1yr: 15.65, 3yr: 30.45%, 5yr: 13.41%, 10yr: 1.13%, SI: 1.18%
ZWEN, total returns as at 2024/02/28: 1yr: 9.12%
Changes in rates of exchange may also reduce the value of your investment.
Disclosure:
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