New York CNN Business  — 

Only a month ago, a significant percentage of investors thought that the Federal Reserve wouldn’t need to raise interest rates in March.

So much for that. The stock and bond markets are now gripped by fears of multiple rate hikes this year.

Inflation worries have become so prevalent in the past few weeks – peaking with Thursday’s consumer price report showing the biggest year-over-year surge in nearly 40 years – that many now believe the Fed needs to aggressively raise rates multiple times.

One prominent Fed member, St. Louis Fed president James Bullard, said Thursday that rates may need to go up by a full percentage point by July.

And influential Democratic Senator Joe Manchin said in a statement Thursday that “it’s beyond time for the Federal Reserve to tackle this issue head on,” adding that “the longer we or the Federal Reserve waits to act, the more economic pain will be caused.”

Is the market overreacting? Some Fed members are arguing that there may not be a case to jack up rates so quickly and by more than a quarter-point at any given meeting.

San Francisco Fed President Mary Daly said a half-point hike “is not my preference” in an interview Thursday. Cleveland Fed President Loretta Mester told CNN’s Richard Quest earlier this week that she expects inflation to cool off later this year, which means the Fed can slow the pace of rate hikes.

With that in mind, federal funds futures trading on the CME now show a 64% chance of a half-point hike in March, down from Thursday’s nearly 100% odds for a so-called 50 basis point increase. Investors are still pricing in a 30% chance of seven rate hikes this year, however.

The Fed’s playbook is written in pencil, not ink

This might be the time for investors to take a deep breath and remember that the Fed has a lot more data to look at before its March 16 meeting. It’s not going to make a decision on rates today based solely on January’s inflation reading.

“Even with elevated levels of inflation, we expect the Federal Reserve to tighten less than the market expects in 2022,” said Richard Saperstein, chief investment officer with Treasury Partners, in a report.

“We do not expect the Federal Reserve to announce rate hikes at every meeting, and such extreme tightening scenarios suggest that we’re currently witnessing peak Fed mania,” he added.

Others argue that the Fed will be reluctant to raise rates too far too fast because the market might have what is essentially a hissy fit. Stocks could plunge and bond yields would surge even higher.

The Fed also might be making a mistake if it raises rates too far too fast. The economy could slow dramatically, especially the highly interest-rate-sensitive housing market.

Memories of huge rate hikes 40 years ago still haunt experts

Fed chair Jerome Powell doesn’t want to be the 2022 version of the late Paul Volcker, the Fed chair in the 70s and 80s who aggressively raised rates to fight inflation, a move that ultimately led to two short but deep recessions.

“If, because of Fed impatience, rates rise more rapidly over the next year, there is a considerable risk of a subsequent relapse as the Fed abandons its new-found and still shaky inflation-fighting resolve,” said David Kelly, chief global strategist with JPMorgan Funds, in a report this week.

Others note that the Fed has time on its side to monitor more data and figure out its inflation plan, and does not have to make any rash moves.

And keep in mind that the Fed, unlike the Bank of England, hasn’t raised interest rates even once yet due to inflation concerns. The last Fed rate hike was in December 2018. So it seems premature to bet on how many times it might hike them this year.

“At present, the Powell-led Fed is still talking about raising rates and reducing its bond purchases, but rate hikes are only theoretical,” said Steve Sosnick, chief strategist with Interactive Brokers, in a report this week.

That means investors are just going to have to keep their eyes on the data, just as Powell and his colleagues are. Everything else, even speeches from Fed members, is noise.