The Federal Reserve Board of Governors today raised short-term interest rates by 25 basis points to 3.5%. In its statement, the central bank noted that "core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated." The Fed made it clear it is not done raising short-term interest rates, noting that "policy accommodation can be removed at a pace that is likely to be measured."
James W. Paulsen, CIO at Wells Capital Management, said the Fed could continue to raise short-term interest rates next year, until the federal funds rate reaches 5%.
"I personally think we've got a ways to go. Certainly, in the last 60 days, the economy has been stronger than anticipated, and now with a 5% unemployment rate and 80% factory utilization rate ... growth from here will be more inflationary."
That might prompt investors to flee bonds, he said, making it the wrong time for the Treasury Department to reintroduce 30-year Treasury bonds - scheduled for Feb. 15. "We're going to be bringing them back at a time when demand will be drying up because people will be reducing their bond exposure because of inflationary fears."