- Fixed Income Portfolio Manager
United States, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
With rising inflation and interest rates dominating the financial headlines in recent weeks, I have been fielding a flurry of colleague and client questions about the likely future trajectory of US monetary policy. While I don’t claim to have all the answers, especially with so many “known unknowns” as of this writing, here are my latest thoughts.
A new policy paradigm, but inflation is a wild card
The annual US headline inflation rate, as measured by the Consumer Price Index (CPI), accelerated to 8.5% year-over-year in March 2022, its highest level since December 1981. With inflation that far above the US Federal Reserve’s (Fed’s) long-term target, I suspect the Fed will feel compelled to tighten monetary policy as swiftly as possible over the next couple of months and will likely not be as supportive of risk markets as many investors have come to expect.
To wit, in a widely anticipated policy move, the Fed on May 4 announced a 50-basis point (bp) increase in the fed funds rate, bringing its benchmark short-term interest rate from 0% – 0.50% to a target range of 0.75% – 1.00%. Meanwhile, the Fed is also intent on gradually reducing the size of its balance sheet, swollen by asset purchases made at the height of the COVID-19 pandemic, in the period ahead. A new era in US monetary policy is seemingly upon us.
What now, specifically with regard to rates and inflation? Many Fed watchers and policymakers alike have said they’d like to see the Fed achieve so-called “neutrality” over the next year, which would likely equate to a target range of around 2.5% – 3.5% for the fed funds rate by mid-2023. That would require several additional rate hikes between now and then, but of course much will depend on how the US inflation backdrop — still a source of considerable uncertainty — evolves over that time frame.
On that score, I also think there is a distinct possibility that we could emerge from this inflationary period that we are now in with a higher average inflation target than the Fed’s current 2.0% threshold. As far as I can tell, that’s not something that is being discussed much, if at all, by pundits and market participants (not yet anyway).
How much further can the Fed really tighten policy?
To no one’s surprise given the state of inflation, recent Fed rhetoric has been much more hawkish than expected last year. The US rates market has come a long way to reflect this reality, but now the all-important question is: How much policy tightening can the Fed really deliver for the rest of 2022 and into 2023, without “overtightening” and potentially tipping the US economy toward recession? Unfortunately, it’s not as easily answered as asked.
Despite many observers’ hope that the Fed can reach a neutral policy rate over the next year or so, few investors or policymakers have much conviction as to what the terminal fed funds rate should be. Again, that’s largely because of the inflation wild card: No one can be sure yet how high or how rapidly US inflation might climb before this cycle is over. What we do know is that inflation has broadened out from mainly COVID-impacted sectors last year to most areas of the US economy today. Accordingly, worker wages have risen as well, posing a real risk of a “wage-price spiral” that pushes longer-term inflation expectations even higher (Figure 1) amid ongoing global supply-chain disruptions from China’s COVID lockdowns and the Russia/Ukraine war.
Bottom line: I think it’s going to take at least two more quarters of reliable economic data to be able to calibrate with any degree of accuracy how much tighter US monetary policy will or can get from here. With that in mind, I’ll be closely tracking a variety of US financial conditions going forward, particularly key economic indicators such as: the labor market (wages and unemployment); existing home and new auto sales (both interest-rate-sensitive sectors); consumer sentiment and longer-term inflation expectations; and, of course, the realized inflation data itself. I will aim to address these topics in more detail in my next blog post.
Figure 1
Expert
Related insights
Showing
of
Insights Posts
Video
A new economic era: Why inflation, volatility, and cycles are back
Continue readingBy
Video
2023-12-31
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Article
4 min
Time to diversify your diversifiers with hedge funds?
Christopher Perret highlights potential benefits of adding uncorrelated strategies, such as hedge funds, to portfolios to navigate turbulent markets.
4 min
Article
2026-10-14
Article
6 min
Credit: the power of flexibility in an uncertain world
Uncertainty in credit markets can create opportunities for investors, provided allocations are flexible enough to benefit. But how can investors balance flexibility with discipline?
6 min
Article
2026-04-30
Video
6 min
Databricks deal overview
Head of Late-stage Growth Matt Witheiler and Global Industry Analyst James McNay discuss their work together on Wellington’s investment in Databricks, highlighting the company’s innovation in AI and data analytics amid the evolving tech landscape.
6 min
Video
2026-05-01
Article
4 min
Early thoughts on historic hike in US tariffs
Macro Strategist Michael Medeiros explores the significant economic and market implications of the latest US tariffs, highlighting potential recession and inflation spikes, and the impact on global trade relations.
4 min
Article
2026-05-31
Article
10 min
Lessons learned from a top-heavy equity market
Can the Magnificent Seven stocks continue to dominate the equity market? And what can asset owners do when markets are narrow? Head of Multi-Asset Strategy Adam Berger and Global Equity Strategist Andy Heiskell discuss the challenges and opportunities.
10 min
Article
2026-04-30
Article
5 min
Sacrificing stocks on the altar of trade
Brij Khurana discusses the Trump administration's new stance on trade and its impact on the US economy, global markets and asset prices.
By
5 min
Article
2026-04-30
Article
3 min
What do tariffs mean for portfolios?
Tariffs exceeded market expectations. Now what? Expect short-term volatility, identify concentrations and consider using sell-offs as an entry point to diversify across regions and styles, says Nanette Abuhoff Jacobson, Global Investment and Multi-Asset Strategist.
3 min
Article
2026-05-31
Whitepaper
12 min
When will capital come back to private equity?
Head of Multi-Asset Strategy Adam Berger and Head of Late-Stage Growth Matt Witheiler consider the state of the private equity market, including liquidity challenges, the effects of higher interest rates, late-stage opportunities, and the impact of AI.
12 min
Whitepaper
2026-03-31
Article
3 min
Could “Liberation Day” trigger a shift in capital flows?
John Butler discusses groundbreaking US tariffs, their impact on capital flows, and the changing investor perception of the US and Europe.
By
3 min
Article
2026-05-31
Article
12 min
Oh baby, baby, it’s a wild world
Just one quarter into the year, many policy and economic assumptions have been turned on their head. What does it all mean for equity, bond, and commodity markets around the world? Members of our Investment Strategy & Solutions Group offer their outlook.
12 min
Article
2026-03-31
Article
8 min
The changing face of Europe: regime change gathers pace
Macro Strategist Nicolas Wylenzek explores the drivers of Europe’s accelerating regime change and its impact on European equity markets and potential areas of opportunity.
8 min
Article
2026-03-31
URL References
Related Insights