Central banks are set to hike policy rates this week. Markets expect rate cuts to soon follow due to cooling inflation, whereas we see central banks holding tight.

Sticky inflation looks to compel developed markets (DM) central banks to crank policy rates higher – and keep policy tight for longer. The Federal Reserve paused last week but pointed to more hikes on the way.

We see the market’s focus returning to higher-for-longer rates and sticky inflation after a U.S. debt ceiling deal. We prefer an up-in-quality portfolio.

Inflation has proven sticky, even as growth weakens. Markets are realizing that policy rates are set to stay higher for longer. We like quality in stocks and bonds.

The ECB and the Fed both need to quickly normalize policy from the emergency settings adopted when the pandemic first hit.

The Fed last week signaled a large and rapid increase in its policy rate over the next two years and struck a surprisingly hawkish tone, indicating it’s ready to go beyond normalizing to try to tame inflation.