Despite the contraction in first-quarter GDP, the falling unemployment rate and signs of a pick-up in inflation persuaded the Fed to stick to its existing plan and taper its asset purchases by a further $10bn, to $35bn per month. It still appears that the first rate hike will come in mid-2015 and that rates will increase only gradually after that. Nevertheless, we believe that a bigger pick-up in inflation will eventually prompt the Fed to raise rates more aggressively than markets currently expect.
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