Kevin Warsh's Inflation Testimony Came as Traders Priced an 86% Chance of a Fed Rate Hold

Kevin Warsh, who became Federal Reserve Chairman at the end of May, recently testified before Congress for the first time. Naturally, stock market investors pay close attention when the Fed chair speaks, especially in sworn testimony. That's because they're looking for clues on the direction of interest rates and the overall economy.

But given Warsh's newness on the job and his view that central bankers should communicate less, his words take on heightened importance. Given the recentness of his comments, it's an opportune time to look more closely at his statements before examining how to invest profitably in line with the Fed's views.

Fed Chair Kevin Warsh answers reporters' questions at a news conference. Image source: The Federal Reserve.

The market expects steady rates

During his testimony, Warsh discussed the importance of bringing down the inflation rate. He also affirmed the central bank's commitment to a 2% inflation goal.

Warsh's comments were consistent with the Fed's June 17 statement following his first meeting as chair. After announcing that the Fed kept the target federal funds rate at 3.5% to 3.75%, the news release noted that inflation has been running above the central bank's target, while claiming it "will deliver price stability."

Among the 18 bank presidents and board of governors who provided interest rate projections, eight expect to keep short-term interest rates steady this year. Another nine project higher rates.

Looking ahead to the next Federal Open Market Committee (FOMC) meeting, which ends on July 29, traders placed an 86% probability that the central bank will leave short-term rates unchanged, according to CME FedWatch.

How to profit

Fighting inflation is a challenge, though. After a brief respite from military action in Iran, the war heated up. That's caused crude oil and gas prices to spike. Drivers paid an average price of about $4 a gallon as of July 20, up from $3.87 a week ago, according to AAA.

With interest rates likely to either rise or remain the same, what's a wise course of action for investors? These two exchange-traded funds (ETFs) should allow you to take advantage of relatively high short-term interest rates.

The State Street SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEMKT: BIL), as its name suggests, invests in U.S. Treasury securities with maturities of one to three months. Investors can confidently expect to get their money back, since these are backed by the U.S. government. Currently, the ETF yields 3.5%, but investors will benefit if interest rates increase since the ETF invests in short-term Treasuries.

For those willing to accept slightly more risk while earning a higher yield, there's the JPMorgan Ultra-Short Income ETF (NYSEMKT: JPST). The fund invests in short-term investment-grade bonds. The securities have fixed and floating interest rates. Naturally, floating-rate securities benefit from higher interest rates. The ETF had a 4.1% yield as of the end of June.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.