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

The Federal Reserve’s hiking cycle suddenly looks alive again.

Wall Street was already growing nervous.

Oil had pushed back above $100, bond yields were surging, the AI capital-expenditure boom continued to add pressure to credit markets, and Thursday’s producer-price report—which feeds into the Fed’s preferred inflation gauge—came in surprisingly hot.

But Chair Kevin Warsh’s ambiguity over the Fed’s next move, made Friday’s final inflation data before next week’s meeting unusually important.

The outspoken Fed Governor Christopher Waller filled in the gap for traders, signaling that “it may not take much acceleration in inflation” to nudge him into supporting a hike.

The CPI then stepped over that low hurdle.

Core consumer prices rose 0.3% in August, above expectations for 0.2%.

Headline CPI climbed 0.4%, with gasoline prices jumping 3.9%.

Traders now price the probability of a quarter-point Fed hike next week at roughly 85%, up from 70% before the report.

The 10-year Treasury yield climbed toward 5%, putting the psychologically important threshold within reach.

Stocks didn’t sulk over the report, with all three indices shooting higher.

For Main Street, the report was just another confirmation of the pressure that has defined the first half of the year, as wage growth decelerated for the fifth month in a row.

Consumer sentiment came in Friday morning at another near-record low.

“We haven’t seen this type of income squeeze since 2012,” Gregory Daco, chief economist at EY-Parpletheon wrote on X.