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Fed faces tough decision on inflation: Jim Paulsen

For the Federal Reserve, the decision to scale back its bond-buying stimulus and to what degree is a bit of a double-edged sword, investment strategist Jim Paulsen told CNBC on Wednesday.

On one hand, the Fed's policies of low interest rates and bond purchases are designed to stimulate the economy without creating substantial inflation. On the other hand, the central bank would like to wind down its stimulus program without disrupting markets.

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The Fed's conundrum became more complicated with news this week that consumer prices recorded their largest increase in more than a year in May as costs for a range of goods and services rose.

To Paulsen, chief investment strategist for Wells Capital Management, "whatever they do is going to have impact." He thinks its consideration of inflation will be key, though.

"One of the greatest taxes you can impose on the middle class of America is a significant, problematic inflation run that eats up the purchasing power of the middle class wage earner," Paulsen said on "Squawk on the Street."

Janet Yellen, chair of the Federal Reserve.
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Janet Yellen, chair of the Federal Reserve.

The Fed is widely expected to announce another $10 billion cut to its monthly bond purchases as it wraps up a two-day policy meeting at 2 p.m. EDT but is likely to make few, if any, other concrete policy moves.

Fed Chair Janet Yellen will hold a news conference to discuss the results a half hour later. Investors will be listening closely for hints about longer-term plans for interest rates.

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"If they [policymakers] just ignore the recent inflation elements, or brush over it without much at all, that, that's very telling," Paulsen said. "They may come out with reference to, maybe some inflation is good. It suggests [a] better economy. We're finally getting there. That's telling. And, if they come out more hawkish, of course, that's telling."

By CNBC's Drew Sandholm, with Reuters.

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