Strategist: Investors should hedge against inflation

Traders work on the floor of the New York Stock Exchange (NYSE) as a television screen displays coverage of U.S. Federal Reserve Chairmman Janet Yellen shortly after the announcement that the U.S. Federal Reserve had hiked interest rates for the first time in nearly a decade in New York, December 16, 2015.

Lucas Jackson | Reuters
Traders work on the floor of the New York Stock Exchange (NYSE) as a television screen displays coverage of U.S. Federal Reserve Chairmman Janet Yellen shortly after the announcement that the U.S. Federal Reserve had hiked interest rates for the first time in nearly a decade in New York, December 16, 2015.

The Federal Reserve‘s revised expectations for interest rate tightening raises inflation concerns, and investors should plan accordingly, Kristina Hooper, U.S. Investment Strategist at Allianz Global Investors, said Wednesday.

“We want to be focused on inflation hedging strategies like TIPS just because there is that potential for inflation to creep in,” she told CNBC’s “Squawk Box.”

TIPS, or Treasury Inflation-Protected Securities, adjust with changes in the Consumer Price Index to protect investors against rising inflation, which can decrease the value of interest yielded by bonds.

Members of the Federal Reserve’s policymaking committee last week indicated they expect to raise rates twice this year. At the December meeting, they suggested they would hike four times. The revision brought Fed expectations for interest rates closer to Wall Street’s outlook.

Keeping rates low usually supports economic activity, which raises the risk that costs will rise, for example, as employers offer higher wages as they compete for a shrinking pool of workers.

Inflation in the United States in January was the strongest in nearly 4½ years, and it ticked up more than expected last month.

“The Fed has certainly come closer to the market than the market coming closer to the Fed, but we’re seeing solid economic data in the U.S., and we need to follow that closely,” Hooper said.

The difference between the Fed and the market’s rate expectations may have narrowed in the near term, but in the longer term, the gap remains wide, said Karin Kimbrough, head of macro and economic policy at Merrill Lynch Wealth Management.

“You go further out and there’s still a big distance between what the market is pricing in, which is maybe only another rate hike in 2017, and at the same time, the Fed is saying they’re going to be doing even more,” she told “Squawk Box” on Wednesday.

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