Short-term bond ETFs are the Fed’s weapon against uncertainty

Jerome Powell and the Fed hit a 180 this week with the future of their asset reduction and interest rate hikes. The Fed sees Covid and Omicron as yesterday’s demons and has set its sights on inflation. With that, the Fed is gearing up for potentially three rate hikes in 2022 and moving away from the story of transient inflation. This could be bad for bond investors, as the Fed’s tone could change if omicron picks up or inflation changes gears, which means there is a lot of uncertainty about future rates. Nonetheless, higher rates could be lower than existing long-term bonds, so those who still invest in bonds should consider switching their investments to shorter-dated fixed income ETFs or less corporate bonds. sensitive. Shorter duration bond ETFs will be more stable under uncertainty about interest rates (unlike in the standard era).

FINSUM: The Fed could just as quickly get off the inflation-fighting hawk train if it gets a run of lower PCE reports, meaning investors need to be prepared for various scenarios.

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