Fed Hikes Rates 25 Basis Points; Four Bond ETFs Positioned for Gains
The Federal Reserve raised its benchmark rate by 25 basis points. Four bond ETFs with short durations or floating rates may benefit from this shift.
Key points
- The Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75-4.00%. This is the first hike in three years.
- Inflation forecasts were raised to 3.7% for headline and 3.4% for core. The Fed expects rates to remain unchanged in 2027.
- Four bond ETFs, including SHV and FLOT, are positioned to benefit. These funds utilize short durations or floating rates to mitigate risk.
The Federal Reserve raised its benchmark interest rate by 25 basis points. This marks the first increase in three years and lifts the target range to 3.75-4.00%.
Policymakers acted to contain persistent inflation amid rising oil prices. The unanimous decision reflects a renewed focus on price stability in a tight labor market.
Inflation forecasts extend beyond 2028
The Fed raised its headline inflation forecast to 3.7% from 3.6%. Core inflation is now expected at 3.4%, up from the previous 3.3% estimate.
These projections indicate that inflation will not reach the 2% target until after 2028. Officials believe they can address price pressures without weakening economic growth.
Further rate hikes expected in 2026
Twelve officials anticipate two additional rate hikes in 2026. Four project three increases, while two expect only one more hike this year.
The median projection calls for rates to remain unchanged in 2027. A single reduction is then expected in 2028 according to the Summary of Economic Projections.
Short-term and floating rate funds benefit
The iShares 0-1 Year Treasury Bond ETF (SHV) holds maturities of one year or less. Its effective duration is only 0.27 years, limiting price sensitivity to rate increases.
SHV yields 3.70% annually and charges 15 basis points in fees. Rising short-term rates allow the fund’s yield to increase quickly while keeping capital losses minimal.
The iShares Floating Rate Bond ETF (FLOT) offers variable coupons tied to underlying indices. This structure protects investors from capital erosion when interest rates rise.
