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."