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Aggressive policy tightening is the name of the game for global central banks. A handful of different central banks around the world moved their policy rates higher this past month, but none caught more attention than the U.S. Federal Reserve.

The FOMC delivered its third consecutive 75-basis-point rate hike, bringing its target policy range to its highest level since 2008 (3.0%–3.25%). The size of the rate hike was widely expected, but the Fed’s updated economic projections jolted markets. It is now calling for below-trend economic growth over the next few years, a not insignificant rise in the unemployment rate, and inflation to stay notably above its 2% target until at least 2024.

The Fed’s message was loud and clear: Conquering inflation is proving to be much harder than expected, and the pursuit of that goal is likely to come with some collateral damage.

Markets reacted in risk-off fashion. Treasuries reached new highs, despite the added fuel to recession-fear flames. S&P 500 stocks declined with the index at its lowest level since the second half of June. Furthermore, the U.S. dollar hasn’t been this strong since the early 2000s.

Strengthen your core

There wasn’t anything cheerful about the Fed’s messaging, and it’s likely to perpetuate the market volatility and sour sentiment we’ve been muddling throughout 2022. If we may add just a glimmer of optimism, there’s still a chance price pressures fade more quickly than the Fed is now expecting.

Nonetheless, there’s a reason why the mantra of “don’t fight the Fed” has had so much staying power, and it may feel daunting to maintain risk exposure in an environment characterized by pervasive uncertainty and high risk-free rates.

So what can investors do about it? For starters, the most crucial consideration for your portfolio is the status of your own personal risk tolerance and long-term goals.

From there, we continue to prioritize our focus on adding to core fixed income. The asset class has been beaten up this year due to the rapid rise in rates, but that in turn has created a compelling entry point. Elevated uncertainty and risk of recession call for this kind of portfolio buffer, with the added bonus of the potential for “equity-like” returns.