The Federal Reserve voted unanimously to raise interest rates by 0.25% Wednesday but a tonal shift in the message from the Federal Open Market Committee post-meeting indicates that there might be an end in sight for rate hikes sooner rather than later, given bank sector stress.
Language in the press release indicates that the Fed is still heavily reliant on individual data points to determine monetary policy and future rate hikes, as has been the case in the last year, creating a fluctuating narrative that has been difficult for markets to predict. Gone, however, was the language of “ongoing increases” as a means to quell inflation and instead resolves to closely monitor the data.
“The Committee anticipates that some additional policy firming may be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the FOMC wrote in the post-meeting statement. New projections revealed that 17 of the 18 members of the FOMC meeting anticipate one more 0.25% increase.
The slowing comes on the heels of the collapse of two regional banks in the U.S. and the subsequent turmoil in the banking sector, a factor that the Fed acknowledged in their press release Wednesday.
“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” the press release stated.
Fed Chair Jerome Powell remarked on the uncertainty of trying to gauge what impacts the banking sector could have on economic slowing in the coming months, calling it “guesswork” at best in a news conference after the meeting: “But we think it’s potentially quite real. And that argues for being alert as we go forward.”
See also: As Banking Fears Spread, Put Your Cash to Work in CSHI
Seek Income With SPYI as Rate Hikes Slow
Banking turmoil and stress could lead to further economic slowing as bank lending to consumers and businesses decreases. For investors looking to put their current exposures to work for income in challenging economic times, the NEOS S&P 500 High Income ETF (SPYI) is worth consideration.
SPYI is an actively managed fund launched last year and seeks to provide high-income opportunities for portfolios within equities while also working to preserve the income generated through its options overlay in times of market stress. The fund seeks to fully replicate the S&P 500 Index and also utilizes a call options strategy layered on top — call options give buyers the right to buy the underlying asset at a specific price (the strike price) within the timeframe of the contract, but they are not obligated to do so.
SPYI has a distribution yield of 12.06% as of 02/28/2023 and seeks to provide higher income through call options the fund writes that it earns premiums on and then can use the money earned from the written calls to buy long, out-of-the-money call options on the S&P 500 Index. An out-of-the-money call option has no intrinsic value because the current price of the underlying asset is below the strike price of the call. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses.
The options that the fund uses are not ETF options but instead are index options that are taxed favorably as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value, and, most importantly, any capital gains or losses are taxed as 60% long-term and 40% short-term no matter how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the call options or equity holdings, or both.
SPYI has an expense ratio of 0.68%.
For more news, information, and analysis visit the Tax-Efficient Income Channel.