The U.S. Federal Reserve delivered its second consecutive rate hike of 75 basis points (bps) this week, as the fight against inflation remains its primary focus. With the federal funds rate range now set at 2.25% to 2.5%, matching its peak from the last hiking cycle and in line with the central bank’s long-term estimated neutral rate, the question becomes how much further the Fed will go.
Fed Chair Jerome Powell has signaled that the central bank will keep moving aggressively as long as inflation continues rising. However, it remains to be seen how the Fed would react if growth slows more meaningfully. Coming into the July 27 meeting, markets were pricing in a terminal rate (the point at which the Fed stops hiking) of around 3.5% and multiple rate cuts in 2023. Equity markets were boosted early Wednesday, after encouraging earnings reports from Microsoft and Alphabet, and remained strong following Powell’s press conference as he opened the door to slowing the pace of the hiking cycle.
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said. “At some point, it will be appropriate to slow down. … We've been front-end loading these very large rate increases, and now we're getting closer to where we need to be.”
Below, we provide perspectives from U.S. economist Jared Franz, and fixed income investment directors David Bradin and Margaret Steinbach.
Institutional investors rely on our newsletter. Have you subscribed?
Get the Capital Ideas newsletter in your inbox every other week
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.
Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
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. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
American Funds Distributors, Inc., member FINRA.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.