Global markets are facing a "mismatch" with the future of U.S. monetary policy and have the potential for major volatility, St. Louis Federal Reserve President James Bullard said Monday.
In May 2013, the Fed's policy minutes sparked fears that the central bank could start tapering its $85 billion-a-month bond purchasing program.
The subsequent market reaction became known as the "taper tantrum," with emerging market currencies tumbling as investors started to bring their dollars back to the U.S. in anticipation of higher interest rates. Yields on 10-year benchmark U.S. Treasurys rose above 2 percent and stock markets reeled as volatility spiked.
In an interview on CNBC, Bullard said this could happen again, with the central bank now looking to raise its main benchmark interest rate this year.
"We do have some potential for that today because the Fed funds futures path, the market based one, is a lot lower and shallower than the Fed's actual (summary of economic projections)," he said.
"So there is a mismatch there, that is going to have to be reconciled at some point."
He added that the Fed's statement last week, which took an unexpectedly dovish tone, could have further misplaced market expectations about the first rate hike.