Higher inflation is coming

Although we expect GDP growth to be a moderate 2.5% next year, the big surprise will be how quickly inflation rebounds. With domestic price pressures mounting and this year’s deflationary shocks from lower commodity prices and the stronger dollar set to fade, inflation will climb above the Fed’s 2% target by mid-2016. Under those circumstances, we believe the Fed will abandon its gradualist philosophy and push the fed funds rate to nearly 2.0% by end-2016 and nearly 3.5% by end-2017.