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Fixed Income
The US Fed's aggressive path could mean more market turmoil
Darrell Spence
Tim Ng
Fixed Income Portfolio Manager
Damien McCann
Fixed Income Portfolio Manager
Wesley Phoa
Gérant de portefeuilles mixtes

With a 75-basis point (bps) rate hike, the biggest single move in nearly three decades, the US Federal Reserve has signalled that bringing down inflation is its primary focus. The Fed moved to a more aggressive policy stance following a firmer-than-expected May consumer price index (CPI) report, which showed an 8.6% increase, driven by broad-based price pressures.

With little indication that these pressures have peaked, and a greater risk that inflation will spiral out of control, the Fed is likely to maintain an aggressive posture unless financial conditions tighten sharply.

“Clearly today's 75 bps increase is an unusually large one, and I do not expect moves of this size to be common. From the perspective of today, either a 50 bps or a 75 bps increase seems most likely at our next meeting,” Fed Chair Jerome Powell said following the June 15 decision. The Fed’s new “dot plot,” which shows the Fed governors’ individual inflation projections, is now signalling that the federal funds rate could be 3.4% by the end of the year. The market appeared to pare back expectations on the pace of rate hikes as a result, and stocks rose immediately after the Fed’s announcement.

Notwithstanding the 75 bps rise, which brings the federal funds rate target to a range of 1.50%-1.75%, the May CPI report left little doubt that inflation is moving higher and remains the Fed’s main concern. The Fed’s latest policy statement said the committee “is strongly committed to returning inflation to its 2% objective,” while Powell said they were “acutely” attuned to inflation risks.

We’re seeing strong contributions to monthly core CPI from both goods and services, although retail spending declined in May, which could suggest demand is starting to cool. Approximately 20% of the sectors in the core CPI basket are experiencing inflation at or below the Fed’s target of 2%, compared to around 55% before the COVID-19 pandemic. Meanwhile, owners’ equivalent rent (24% of the CPI basket) is moving decisively higher, a trend that will likely persist in the coming months.

Inflationary pressures are broad based1

chart Inflationary pressures are broad based

The central bank’s job is made that much more difficult because the labour market is extremely tight. Recent academic and private-sector research shows that it may be even tighter than the official data suggests because of the decline in the labour force participation rate. Below, we provide perspectives from US economist Darrell Spence, fixed income portfolio managers Tim Ng and Damien McCann, and solutions portfolio manager Wesley Phoa.

1. Source: US Bureau of Labor Statistics. CPI = consumer price index. Core CPI refers to all items in the consumer price index excluding food and energy. “Other” comprises all categories in the core CPI excluding transportation services, shelter and transportation commodities. Data as of 10 June 2022.


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Darrell R. Spence covers the United States as an economist and has 31 years of industry experience (as of 12/31/2023). He holds a bachelor’s degree in economics from Occidental College. He also holds the Chartered Financial Analyst® designation and is a member of the National Association for Business Economics.

Tim Ng is a fixed income portfolio manager at Capital Group. As a fixed income investment analyst, he covers US Treasuries, TIPS (Treasury Inflation Protected Securities, a type of Treasury security issued by the US government.), and interest rate swaps. He has 16 years of investment industry experience and has been with Capital Group for eight years. He holds a bachelor’s degree with honors in computer science from the University of Waterloo, Ontario. Tim is based in Los Angeles. 

Damien McCann is a fixed income portfolio manager at Capital Group. He has 24 years of investment industry experience, all with Capital Group. Earlier in his career at Capital, he was a fixed income investment analyst and covered energy, leisure and lodging, and rails. He holds a bachelor's degree in business administration with an emphasis on finance from California State University, Northridge. He also holds the Chartered Financial Analyst® designation. Damien is based in Los Angeles.

Wesley Phoa est gérant de portefeuilles mixtes chez Capital Group et possède 25 ans d’expérience. Il est titulaire d’un doctorat en mathématiques pures de Cambridge et d’une licence de l’Australian National University. Il est membre élu de la Conference of Business Economists et de l’International Conference of Commercial Bank Economists, et il siège au comité de rédaction de The Journal of Portfolio Management.


Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.