Wall Street thought the Powell hike was over. Now Kevin Warsh has his ‘back against the wall’

Wall Street spent weeks convincing itself that the Federal Reserve was finally done raising interest rates, but a fresh wave of economic data has shattered that confidence. After a period of relative optimism, the hiking cycle appears to be breathing again, driven by a combination of soaring oil prices and a producer price report that came in surprisingly hot. This volatility left investors clinging to every word from central bank officials, particularly following signals from Governor Christopher Waller that even a slight uptick in inflation could trigger further hikes.

The breaking point arrived with the latest Consumer Price Index report, which saw core prices climb 0.3 percent in August, surpassing analyst expectations. While gasoline prices jumped significantly, contributing to a headline increase of 0.4 percent, some analysts noted that a massive spike in wireless telephone service costs skewed the results. In fact, removing cellphone service fees would have brought core inflation down to 0.2 percent. Despite this nuance, the market reacted swiftly, pushing the probability of a rate hike next week to roughly 85 percent and sending the 10 year Treasury yield creeping toward the psychological barrier of 5 percent.

For everyday consumers, these numbers are less about market probabilities and more about a tangible squeeze on their wallets. Wage growth has slowed for five consecutive months, leaving many households struggling to keep pace with rising costs. Economists note that we have not seen this kind of income pressure since 2012, reflected in consumer sentiment hitting near record lows. Meanwhile, energy costs continue to pose a systemic risk, as expensive oil threatens to bleed into everything from airline tickets to plastic packaging over the coming months.

Despite the grim outlook for borrowing costs and living expenses, equity markets have remained strangely resilient, fueled largely by an ongoing artificial intelligence boom. However, veteran observers warn that this defiance may not last forever if financial conditions tighten too quickly under the weight of high bond yields and renewed Fed aggression. As Chris Zaccarelli of Northlight Asset Management put it, the Fed now finds itself with its back against the wall because bull markets rarely fade away naturally; usually, they are killed by the central bank.