In the U.S. Treasury market, futures contracts suggested that investors were "making the same mistake they made at the outset of the last three major tightening cycles", by underestimating the amount the federal funds rate will be raised.
"We think the Committee will raise the rate faster and further than most anticipate in response to higher inflation and that this will drive up the 10-year Treasury yield significantly," chief markets economist at Capital Economics, John Higgins said in a note to clients on Monday.
Capital Economics forecast suggest the funds rate will be in range from 1.75 percent to 2 percent in September 2016, whereas the implied rate of the current futures contract is around 0.8 percent.
"Admittedly, this implied rate, and those implied by the prices of other financial market instruments, may be distorted by uncertainty about the path of monetary policy. But our end-2016 forecast for the rate (a range of 2.25-2.5 percent) is still significantly higher than the latest median projection of FOMC participants (1.625 percent)" Higgins said.
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In terms of when the Fed usually starts to hike rates in economic cycles, Donovan said this time around the central bank is "very, very" late in raising rates, which could become a worry to markets if inflation continues to pick up.
"I actually think it (the Fed) may be a bit behind the curve, I think the markets might start to worry about this, as the gap between the core Personal Consumption Expenditure deflator (the Fed's monitor of inflation) and CPI (consumer price index) (what the market watches) starts to widen," Donovan said.
"I think the market might start to think 'you know perhaps you should have started to hike sooner' and we might actually see that coming into a bit of the pricing," he added.