ETFs To Gain/Lose If Fed Turns Hawkish For 2018

All eyes are currently on the crucial two-day FOMC meeting slated to start today as the central bank is highly anticipated to raise interest rates by a quarter percentage point to 1.25-1.5% for the third time this year. Per the latest CME Group's FedWatch tool, the odds of a December rate hike is 96%. The Fed funds’ futures market shows 100% chance of a liftoff.

Investors are also keenly awaiting the Fed’s guidance on the 2018 rate trajectory.

Hawkish Views for 2018

Fed officials are expecting three rate hikes next year while a few firms like Goldman (GS - Free Report) and Deutsche Bank (DB - Free Report) predict faster rate hikes, may be up to four times, as the U.S. economy is heading into 2018 with strong momentum that is likely to boost wages and inflation.

Meanwhile, Wall Street economists such as Citigroup (C - Free Report) and JPMorgan Chase (JPM - Free Report) are bracing for the biggest tightening of monetary policy in more than a decade. Average interest rates across advanced economies will likely climb to at least 1% next year to what would be the largest increase since 2006.

This is especially true as the world’s largest economy is expanding at the fastest clip in three years with the best back-to-back quarters of at least 3% GDP growth and is near full employment confirmed by a strong November jobs report. Unemployment dropped to the lowest level since December 2000 to 4.1%.

Further, Americans are highly optimistic about the economy with consumer confidence climbing to the highest level in 17 years. Moreover, Trump’s pro-growth policies to slash corporate taxes are nearing approval in Congress. If this happens, we will see an economic surge, boosting job growth and inflation. This signals faster rate increases in the coming years.

Given the expectation of a tighter monetary policy, several ETFs are in focus ahead of the Fed meeting. A few ETFs will be rewarded if the Fed gives hawkish signals while a few will be severely impacted. Let’s have a look at both:

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