Fed Rate Cuts To Come 'As Early As July'? Dovish Turn Sparks ETF Rebound Hopes

Federal Reserve Governor Christopher Waller may have just handed ETF investors a mid-summer plot twist.

In a Friday interview with CNBC, Waller said the U.S. central bank could start cutting interest rates as early as July, a stark pivot after six straight months of holding the line.

The Federal Open Market Committee (FOMC) is set to meet on July 29–30, and while a rate cut is far from guaranteed, Waller's comments have given markets, and particularly rate-sensitive ETFs, fresh fuel for speculation.

"We could do this as early as July," said Waller, who noted that inflation and GDP are now hovering near the Fed's long-run targets. He also estimated that the current benchmark rate is about 1.25 to 1.5 percentage points above the "neutral" level.

That's Fed-speak for: we might have over-tightened, and it could be time to ease up.

Also Read: AllianceBernstein’s EMOP ETF Targets Growth In Emerging Markets

ETF Sectors That Could Rally On Rate Cuts

• Real Estate ETF: REITs, which are highly sensitive to interest rate changes due to their dependence on financing, have underperformed in the higher-rate environment. A dovish pivot could breathe life into real estate ETFs like Vanguard Real Estate ETF VNQ and iShares U.S. Real Estate ETF IYR as rate cut expectations build.

• Utilities ETFs: Often seen as bond proxies because of their stable dividends, utility stocks tend to outperform when rates fall. If the Fed starts easing, utilities ETFs like Utilities Select Sector SPDR Fund XLU could attract income-hungry investors looking to lock in relatively higher yields.

• Tech and Growth ETFs: Lower interest rates boost the net present value of future earnings — a key tailwind for growth-heavy ETFs. High-duration tech plays, many of which are concentrated in funds like Invesco QQQ Trust QQQ and ARK Innovation ETF ARKK, could benefit as the cost of capital falls and investor risk appetite grows.

• Bond ETFs: Treasury ETFs with longer durations could rally on falling yields, particularly if the Fed signals a steady easing cycle. The iShares 20+ Year Treasury Bond ETF TLT has already seen slight upward price action in anticipation of policy shifts, and Waller's remarks could intensify that trend.

But Wait, The Fed's Still Divided

Despite Waller's optimism, not everyone at the Fed is reaching for the rate-cut button. At the most recent policy meeting, seven Fed officials indicated they expect no cuts this year, according to Bloomberg. Others are sticking to the expectation of two cuts before year-end, a classic case of monetary policy déjà vu.

Then there's the geopolitical wildcard: Waller cautioned that any rate easing would come with caveats, especially if shocks, like Middle East escalations, reignite inflation.

That means inflation hedge ETFs like the iShares TIPS Bond ETF TIP or broad commodity funds like Invesco DB Commodity Index Tracking Fund DBC may still be worth holding in a diversified strategy.

The Trump Factor: A Political Sideshow?

President Donald Trump, who remains a vocal critic of the Fed, has been hammering the central bank to cut rates, suggesting it would help reduce ballooning interest costs on the government's debt. The Treasury has already shelled out $776 billion in interest payments over the past eight months, more than what the U.S. spent on defense.

But Waller didn't mince words: the Fed doesn't exist to make the government’s debt cheaper.

"Our mandate from Congress tells us to worry about unemployment and price stability," Waller said. "It does not tell us to provide cheap financing to the US government."

Bottom Line

Waller's comments suggest that the Fed is growing increasingly comfortable with the idea of normalizing rates, or at least dipping a toe into the water. For ETF investors, that opens the door to rebalancing toward sectors poised to benefit from falling rates, even as the inflation story continues to lurk in the background.

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