Recent market movements suggest that some investors are concerned that the Federal Reserve may increase rates too much, leading to a policy mistake.
The falling market gauges of inflation expectations, equity market volatility, and a deepening yield curve inversionĀ are indicative of concerns about Fed boss Jerome Powell's hawkish comments.
Markets are now betting on whether the Fed will hike by 25 or 50 basis points.
The Federal Reserve had pledged to increase its efforts to fight inflation, which spooked some investors who believe the Fed may end up moving too aggressively after moderating its stance.
The Fed's messaging may haveĀ become erratic as it reacted to successively weak then strong economic data.
While some believe that the Fed risks making a policy mistake if it reacts to recent data with larger rate increases, others are concerned about the Fed potentially hiking rates too far.
Falling market gauges of inflation expectations, equity market volatility, and a deepening yield curve inversion show the potential for a policy mistake.
Cosimo Marasciulo, head of fixed income absolute return at Amundi, said that investors are beginning to worry that the Fed may hike rates too far.
"We are maybe very short term in an era in which the market is not convinced about this higher terminal rate, so that's something interesting to watch," he said.
While the Fed's pledge to increase its efforts to fight inflation is spooking some investors, others believe that the Fed risks making a policy mistake.
Fed Chair Jerome Powell told lawmakers that the central bank would likely need to raise interest rates higher than expected in response to recent economic data.
Friday's employment report and next week's inflation report would be key factors in determining whether policymakers would return to jumbo-sized rate increases after scaling back to a quarter-percentage-point hike last month.