The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points (bps) this week, as inflation remains above target even as economic growth slows.
The latest rate increase brings the federal funds rate to a range of 5% to 5.25%. Market pricing indicates this could be the final or penultimate hike this cycle, as the effects of monetary policy are becoming apparent (as highlighted most recently by the takeover of First Republic Bank).
Fed Chair Jerome Powell suggested the current level of rates may be sufficiently restrictive to bring down inflation. He highlighted that the central bank made a “meaningful change” to its policy statement, removing language that signaled more rate increases would be appropriate.
“I think that policy is tight,” Powell said. “If you put the credit tightening on top of [the current level of rates] and the [quantitative tightening] that's ongoing, we may not be far off.”
However, he reiterated that no decision to pause had yet been made and pushed back against a suggestion that the Fed would cut rates by the end of the year.
Here are the latest views of fixed income portfolio managers Ritchie Tuazon, Tim Ng and Tom Hollenberg. They are members of Capital Group’s U.S. interest rates team.
Duration is a measure of the approximate sensitivity of a bond portfolio's value to interest rate changes.
Yield curve measures the difference between the yields of bonds of different maturities. A yield curve is said to be inverted when shorter term bonds provide higher yields than longer term bonds.
Yield curve steepening occurs with long-term rates rising more than short-term rates, or short-term rates falling more than long-term rates.
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