This year has brought two Federal Open Market Committee (FOMC) meetings, but no interest rate reductions by the Federal Reserve. Following the most recent meeting, it appears the best-case scenario for 2026 rate reductions is just one. Word on the street: It won’t arrive from the Fed until September or October.
That’s likely disappointing to a broad swath of market participants. However, there’s good news. It’s unlikely the Fed is mulling rate hikes, according to Kevin Flanagan, head of investment and fixed income strategy at WisdomTree.
Even with no rate hikes coming, the combination of rate steadiness and disappointment in the lack of cutting could make the WisdomTree Floating Rate Treasury Fund (USFR) an appealing idea for fixed income investors. As a floating rate note ETF, the $16.66 billion USFT features a tiny effective duration of 0.02 years. However, a challenging geopolitical and macroeconomic environment could be all the prompting advisors and investors to reduce duration risk.
USFR a Fine Idea for This Environment
USFR’s lack of duration may appeal at a time when both geopolitical and macroeconomic headwinds weigh on risk assets. Before the conflict-related surge in oil prices, the Consumer Price Index was trending in the right direction. However, as Flanagan pointed out, the Personal Consumption Expenditures (PCE) — the Fed’s preferred metric — resides at 3.1%, well above the central bank’s desired target of 2%.
“The Fed will probably ‘look through’ the recent surge in energy prices. Yes, this development has created a noteworthy shift in inflation fears, but if there are no further adverse Middle East developments and hostilities are not prolonged, oil and gasoline price increases could reverse quickly,” observed Flanagan. “In fact, September 2026 futures prices for WTI crude oil have not experienced the same run-up in price that the nearby contract has.”
Potentially boosting the appeal of USFR is a simple factor: The Fed is in a tough spot. Cutting rates may be risky at a time when energy prices are surging. Conversely, raising rates when the labor market is weak could have negative consequences as well. Thus, neutrality may carry the day. That could work in favor of USFR — an ETF with an embedded income yield of 3.73%.
“Based upon the macro and inflation outlook, there does not appear to be a need for policy to enter an ‘accommodative phase,’ but perhaps just get back to ‘neutral,’” concluded Flanagan. “This is a point Powell & Co. have also made. If you believe ‘neutral’ begins somewhere around 3.50%, then we are essentially already there, or very close.”
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