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Bill Dudley

Markets Are In for an Interest-Rate Surprise

A 4.5% peak in the Fed’s target rate isn’t out of the question.

He might surprise you.

He might surprise you.

Photographer: Daniel Acker/Bloomberg

When Treasury Secretary Janet Yellen recently made the innocuous observation that the Federal Reserve might at some point have to increase interest rates to keep inflation in check, financial markets became so flustered that she had to revise her comments.

She was right the first time. I would go even further: Not only will the Fed have to raise rates, but rates are likely to go much higher than investors anticipate.