Fed tightening pace dependent on market reaction

New York Fed President William Dudley noted last week that the pace of rate hikes will depend a lot on the reaction to the initial lift-off in financial markets. The upshot is that, while there is an awful lot of uncertainty surrounding the path of short rates, there is probably less uncertainty surrounding the path of long rates. The Fed will adjust the pace of its rate hikes to ensure that long-term yields rise, but not too rapidly. That supports our view that the 10-year Treasury yield will rise gradually to 2.5% by end-2015 and to 3.0% by end-2016.