Fed Pause Amid Stagflation Risks? Smart ETF Moves to Follow

Federal Reserve Chairman Jerome Powell said Wednesday that the central bank will "wait for greater clarity" before making any interest rate changes. This cautious approach comes as President Trump’s newly announced tariffs are expected to lead to "higher inflation and slower growth" — an economic condition known as stagflation.

Powell acknowledged that these twin developments could place the Fed in a difficult position. As he explained in a speech in Chicago, the Fed’s job is to keep prices stable and generate employment — but those goals may now be in conflict.

Economic Outlook: Uncertainty Ahead

In a follow-up Q&A session, Powell said there is a "strong likelihood" that the U.S. economy will move away from both of the Fed’s key objectives for the remainder of the year — or, at the very least, not show considerable improvement.

Powell also addressed the recent turbulence in the bond market, which followed Trump’s April 2 "Liberation Day" tariff announcement. Yields spiked, causing concerns (read: ETFs to Play Amid Long-Term Yields' Best Week Since 1982).

He acknowledged that inflation has moderated but still runs slightly above the Fed’s 2% target, and warned that Trump tariffs may accelerate inflation. Meanwhile, economic growth in the first quarter was just 0.3%, according to CNBC’s Rapid Update, which compiled forecasts from 14 economists. The survey also reflected Core PCE inflation will remain stuck at around 2.9% for most of the year. Consumer and business sentiment are on the decline.

What Happens During Stagflation?

During stagflation, individuals’ savings accounts suffer as currency inflation cuts the value of their low-yield investments. Hence, one needs to resort to the stock market for inflation-beating gains. Against this backdrop, below we highlight a few ETF strategies that could safeguard your portfolio.

Try Out Inflation-Beating Products

There are some ETFs available that could help safeguard your portfolio amid the growing risk of stagflation. These ETFs are Horizon Kinetics Inflation Beneficiaries ETF INFL, Quadratic Interest Rate Volatility and Inflation Hedge ETF IVOL and Astoria Real Assets ETF PPI.

The INFL ETF seeks long-term growth of capital in real (inflation-adjusted) terms. It invests primarily in domestic and foreign equity securities of companies that are expected to benefit, either directly or indirectly, from rising prices of real assets.

The IVOL ETF invests, directly or indirectly, in a mix of U.S. Treasury Inflation-Protected Securities and long options tied to the shape of the U.S. interest rate curve.

The PPI ETF has exposure to cyclical stocks (such as natural resources, energy, industrials and materials), commodities and TIPS.

Who Can Forget Gold?

A stagflation-like scenario could boost safe-haven assets like gold. Gold performs well in periods of economic stagflation as investors tend to exit stocks, bonds, and cash. Investors should note that gold is often viewed as an inflation-beating asset. The last significant episode of inflation in the United States occurred from 1973 to 1979.

Within this period, inflation averaged around 8.8% annually, and gold earned an average annual return of 35%, per CME Group, as quoted on Forbes.SPDR Gold Shares GLD is a top play here (read: Gold to Hit $3700? ETFs in Focus).

High-Yielding Bond ETFs are Great Bets

At the maturity of bonds, investors receive the face value of the product. Meanwhile, products that offer inflation-beating current income could be great picks. FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund LKOR is an investment-grade high-yield bond ETF, which yields 5.72% annually.

Consumer Staples: A Safe Option

The sector is enjoying a few benefits at this moment. If there is stagflation in the U.S. economy, demand for staples like food will be constant. Moreover, the sector offers a decent dividend yield which is needed to beat inflation. Hence, U.S. staples manufacturers are likely to be another safe bet to invest in. Consumer Staples Select Sector SPDR ETF XLP yields about 2.52% annually.

Healthcare: Yet Another Safe Bet

Health Care Select Sector SPDR ETF (XLV) is another winning option as the sector’s demand is indispensable, irrespective of the economic condition. Job gains in the sector have also been steady in recent times.

Time for Cryptocurrency?

Bitcoin is often touted as a hedge against inflation. Bitcoin has a fixed supply (21 million). This move contrasts with traditional fiat currencies, which central banks can issue in unlimited quantities. Thus, in times of inflation, the value of fiat currencies tends to fall.

Meanwhile, some market watchers view Bitcoin as a store of value due to its limited supply which can preserve wealth amid high inflation. iShares Bitcoin Trust IBIT could be a good play in this field. Having said this, we would like note that crypto space is very volatile.

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

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