Fed decision: The tug-of-war continues

The Fed’s rate increase and accompanying statement this week apparently did little to convince the market that the U.S. central bank wouldn’t flinch in its bid to bring inflation under control. With the U.S. labor market tight, we believe that the Fed will be biased toward additional hawkishness, even if that means tolerating an acceleration in the economic slowdown to ease the upward pressure on wages. We believe that bond investors should maintain a cautious stance and seek sufficient carry on shorter-duration securities until clarity emerges on the longer-term path of inflation and policy rates.