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Fed funds rate projected to increase at fastest pace in a decade
By 2015, the federal funds rate is expected to have increased at the fastest pace in a decade, according to the Fed.
While the Fed has communicated that its plans for adjusting monetary policy will be driven by economic data rather than a timeline, seventeen members of the Federal Open Market Committee have provided projections of where they expect the federal funds rate will be in coming years, and over longer time periods.
Most FOMC members anticipate that the rate will remain close to zero throughout 2014. They then see it rising by approximately 1% per year in 2015 and 2016.
While such levels would still be relatively low compared with long-term averages, the pace of increases would be the fastest since the series of increases that occurred from 2004 to 2007.
Despite the fact that the Fed has maintained its short-term rate close to zero, longer-term interest rates edged higher in 2013. Consequently, Treasury yields soared more than 1% and mortgage rates also surged, raising concern among fixed-income investors.
"Interest-rate volatility is a component of this environment that is likely to continue," said Bill Kohli, Co-Head of Fixed Income at Putnam Investments. "But that does not preclude opportunities for fixed-income investors. Strategies that seek to mitigate or neutralize duration risk are critical in a rising-rate environment."
Periods of rising rates have resulted in losses on bonds.