Fed Holds Rates Steady, May Hike Ahead: ETFs in Focus

Earlier this month, Lorie Logan argued that inflation has remained elevated for too long and is not on track to return to the Fed's 2% target. She believes that moderately higher interest rates would be appropriate under current conditions, as quoted on the same Yahoo Finance article.

Fed Reaffirms Commitment to 2% Inflation Target

The Fed reiterated that inflation remains elevated due to higher energy prices linked to the Middle East conflict. Policymakers also reaffirmed their commitment to restoring price stability.

Fed Chair Kevin Warsh said the U.S. economy remains resilient with a steady labor market. However, Warsh emphasized that inflation remains above the Fed's objective and reaffirmed the Fed’s inflation goal of 2%.

Although inflation data showed encouraging progress in June, the improvement may prove temporary as renewed geopolitical tensions have pushed oil prices higher again. This may lead the Fed to hike rates ahead. Several policy makers who supported unchanged rates, cautioned that if inflation fails to resume its downward path, additional rate hikes could become necessary.

Record-High Rates in Early 1980s

The federal funds rate reached record highs in the early 1980s as the Fed fought inflation above 13% during the "Great Inflation" era, as quoted on Yahoo Finance.  Policymakers then aggressively tightened monetary policy, pushing the federal funds rate above 19%.

Dot-Com Bust Triggered Rate Cuts

The Fed began cutting interest rates in the late 1990s and early 2000s after the dot-com bubble burst, which triggered bankruptcies, and weaker economic growth.

Financial Crisis Pushed Rates to Near Zero

Following the 2007 housing crash, the Fed aggressively cut rates, bringing the target range to 0%-0.25% by December 2008.

COVID-19 Pandemic Brought Another Emergency Easing Cycle

After gradually raising rates following the financial crisis, the Fed reversed course in March 2020 as COVID-19 hit the global economy, cutting the federal funds rate back to 0%-0.25%.

Inflation Surge Led to Rapid Rate Hikes

Beginning in 2022, the Fed launched one of its most aggressive tightening cycles in decades as inflation surged to a 40-year high. The benchmark rate peaked at 5.25%-5.5% in 2023, its highest level in more than two decades, per Yahoo Finance.

As inflation eased, the Fed began cutting rates in late 2024 and kept them at 4.25%-4.5% until September 2025, before delivering three consecutive 25-basis-point cuts in September, October, and December. So far in 2026, the Fed has held rates steady at 3.5%-3.75% (read: Fed Cuts Rates & Hints at Two More Cuts in 2025: ETFs to Play).

Markets Are Increasingly Pricing in a Rate Hike

Sticky inflation has led investors to reassess the interest-rate outlook. According to the CME FedWatch Tool, markets are currently pricing in nearly a 65% probability of a rate hike in September (at the time of writing). State Street SPDR S&P 500 ETF Trust SPY has slumped 1.5% on July 29, 2026, reflecting this expectation.

ETF Strategies to Play Higher Rates

Investors can play the scenario with floating rate bond ETFs like iShares Floating Rate Bond ETF FLOT (yields 4.46% annually), cash-like ETFs like JPMorgan UltraShort Income ETF JPST (yields 4.22%), niche ETFs like Simplify Interest Rate Hedge ETF PFIX (yields 8.93% annually).

Boost Your Portfolio with Our Top ETF Insights

Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.

Don’t miss out on this valuable resource. It’s free!

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research