The Federal Reserve Board today raised short-term interest rates by 25 basis points to 3.25%, as expected. The central bank hinted it intends to keep raising short-term interest rates at a pace "that is likely to be measured," although it left the door open for more aggressive increases if the economy heats up more than anticipated. In its statement announcing the interest rate increase, the Federal Open Market Committee also noted that "although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually."
James W. Paulsen, CIO at Wells Capital Management, said while the Fed's interest rate increase was expected, some might have been disappointed that the central bank did not articulate that it might be finished with interest rate increases.
"In the bond markets, there is some of the mentality that if the Fed is going to keep at it, they might then overdo it, and then if they do, they could really slow the economy," he said.
However, Mr. Paulsen added, his personal view is that the economy is "pretty hot." The central bank, he said, might be "underestimating the strength of the economy, and of inflation too, and I don't think the Fed is ahead of itself. If anything, I think bond yields will go up again in the next 90 days, and the Fed will then have to raise rates again."