Fed rate hike: 3 views on what's next

The Fed's recent quarter-point rate hike signals a return to normalcy after years of ultra-low borrowing costs. Capital Group economists believe the U.S. economy, bolstered by a strong labor market and AI investments, can absorb these increases without stalling GDP growth. They anticipate three to four more hikes by the end of 2027, pushing the federal funds rate towards 5%.

In this environment, dividend-paying stocks, especially those in healthcare and select financials, are favored for their resilience and predictable cash flows. These companies are less sensitive to economic cycles and can perform well as rates rise. Growth stocks, reliant on future earnings, may face more volatility.

Long-term Treasury yields could stabilize if the Fed convincingly combats inflation. While the economy has absorbed rate hikes well, uncertainty remains about the ultimate restrictive level. Investors can find attractive income in the current bond market, offering a cushion even if further hikes occur.