Fed and Bond Investors Face a Rude Awakening

The Federal Reserve projects three interest rate hikes next year, although the market is priced for fewer.

Yet, recent public statements by senior central bank officials suggest some disagreement over the causes of the recent moderation in inflation. That means policy makers might be reluctant to continue raising rates beyond the Open Market Committee meeting this week without evidence that inflation is moving more decisively toward the 2 percent target. So, it is not surprising that markets are priced for fewer policy actions and that the yield curve implies investors expect rates to remain low for some time. These views indicate that bond investors and Fed officials are in for a rude awakening , as it is very likely that higher inflation lies ahead.