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That's not a bug. It's the entire aim of an electoral system.
The people who aren't the extreme ends of two poles and actually have policies the majority are in favor of are the people who are supposed to be in office. I shouldn't be choosing between "arrest people for using birth control" and "eat the rich and disband the police".
You also don't get progress in any direction when both parties are spending half their time unraveling everything the last group did.
I wouldn't call it a bug, just that a naive ranked ballot naturally favours the centrist voices. I don't even mean this in an extreme way: in Canada we basically have three centrist, neoliberal parties running parliament, and this would mean that the Liberals just win a majority almost every time. NDP voters generally won't vote Conservative, Conservative voters won't vote NDP.
This can turn into a bug because it ends up pushing other voices out: if the popular vote suggests equal support between left, right, and center candidates, you would typically hope the make-up of the government reflects that, but more likely it would look like a center majority. There are ways to mitigate this (large number of parties, electing multiple candidates on a ballot, proportional components of the vote, etc) but ranked choice on its own tends to be a centralizing force, not a way to get a more representative democracy.
Again, not a bug, and I definitely wouldn't call it worse than FPTP, just making it clear that it has its own biases that are worth taking into account.
If the Canadian Liberals thought it'd win them more elections, they would've done an election reform years ago.
...like they'd initially promised.
The center should be the people representing the country. There's a lot of room in there for a diverse, varied set of perspectives. The fact that 1/3 of the country hates the two extremes and is OK with the middle is exactly why the people in the middle are the ones who are supposed to be elected.
The middle will move over time as the electorate's value change. That's where progress happens. The 10% who are Neo Nazis should absolutely not have anyone make it into office. That's not what functional government is.