Fed chairman Jerome Powell reinforced in his comments that the central bank’s primary goal is to tamp down inflation — which is running at a 40-year high — and that it will do what it takes to bring it closer to target. The central bank chief also talked positively about growth and the labor market. “All signs are that this is a strong economy,” Powell said. “Indeed, one that will be able to flourish … in the face of less accommodative monetary policy.”

The Capital Group (TCG) maintains the view that inflation will remain elevated and that monetary policy is behind the curve. Markets are pricing in about seven 25-basis-point rate increases in 2022. Powell seems confident that the U.S. economy can withstand higher rates, and so barring a major fundamental shock, we expect the Fed will continue on its tightening path for the rest of 2022. He left open the possibility of a 50-basis-point hike but did not specify what might trigger such a move.

Against this backdrop, TCG maintains a defensive posture in our fixed income portfolios. In U.S. core bond portfolios, in addition to a short duration and positioning for a flattening of the yield curve, they also favor a slight relative underweight to credit. Meanwhile, TIPS prices largely reflect inflationary expectations, so managers are more opportunistic based on where they see value along the maturity spectrum.

In many equity portfolios, depending on investment objectives and mandate, TCG is starting to see managers selectively add to investments in energy, materials, mining companies, consumer staples and other consumer-related companies with a degree of pricing power.

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Source: Capital ideas