The Federal Reserve Board today raised its federal funds target rate by 25 basis points, to 1.5%. "In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward," the Fed said in a statement.
Thomas J. Marthaler, vice president and director of fixed income at ABN AMRO Asset Management, and Casey Colton, vice president and senior portfolio manager at American Century Investments, expect the Fed to gradually raise the target rate to 2% by year's end.
"We will see intermediate and long rates rising," Mr. Marthaler said. "The current market doesn't reflect that."
Mr. Colton suggested the Fed is seeking to keep inflation relatively low while not harming the economy. "If monetary policy is too accommodative, you create conditions for an inflation spiral," he said.