Federal Reserve officials have watched closely as interest rates plunged the last few weeks. Apparently, they don't like what they see.

• Markets were becoming too confident in future easing, starting to price in only modest rate increases, and possible cuts next year. That partially reversed yesterday after some hawkish Fed talk.

Why it matters: Traders have been betting that the Fed will eventually back off its tightening campaign, but the Fed is saying "not so fast."

State of play: The yield on 10-year Treasury bonds has fallen from 3.48% in mid-June to 2.61% Monday, as investors started to bet on lower inflation. With that may come less aggressive monetary tightening.

• That's fed lower mortgage rates, and fueled a July surge in risk-sensitive assets.
• To an extent, markets were declaring "mission accomplished," with pricing implying the Fed's war on inflation was close to being won.

Yes, but: Markets have gotten ahead of the Fed itself. The central bank is giving the clear sense they still need to keep pushing rates upward and do not expect to end up cutting next year.

• “We are still resolute and completely united on achieving price stability, which doesn’t mean 9.1% inflation...so a long way to go," said Mary Daly, San Francisco Fed President, in an interview on LinkedIn. “It really would be premature to unwind all of that and say the job is done."
• Cleveland Fed President Loretta Mester told the Washington Post that she needs to see "very compelling evidence" price pressures are receding.
• And Minneapolis Fed President Neel Kashkari pronounced himself "surprised by markets' interpretation," telling the New York Times the Fed will "continue to do what we need to do until we are convinced that inflation is well on its way back down to 2 percent — and we are a long way away from that.”

In an interview with Axios, Richmond Fed President Tom Barkin emphasized the need for policy that's appropriately restrictive.

• "I think we’re going to need to get real forward-looking interest rates into positive territory throughout the yield curve," Barkin told Axios Raleigh's Zachery Eanes. "Near-term rates are not above near-term inflation and I think we're going to need that."

The Fed officials are worried that market moves are undermining their tightening strategy — and implicitly, that they are more determined to keep up the pressure than market prices imply.

• Bonds are getting the message. The 10-year yield is back up to 2.82% this morning, and the five-year real yield is back up to 0.2% this morning.

The bottom line: There is a dance occurring between the Fed and markets, with the central bank pushing back when markets turn complacent. There should be a lesson for anyone who expects the path toward disinflation to be painless.

Many are bracing for the great "trade-down" — i.e., inflation-squeezed consumers reining in spending and opting for cheaper goods. But anecdotes from corporate earnings also show a subset of shoppers are still splurging.

Why it matters: What's emerging is a strong signal about the pocket of consumers getting hit hardest by soaring costs as a bigger share of their income gets eaten up by high prices.

• Others, though, aren't changing their behavior at all.

What's going on: Executives at Molson Coors say more beer drinkers are switching to its cheapest brews, like Keystone Light. But the company is still selling higher volumes of its "above-premium" (the most expensive) brands.

• At Chipotle, higher-income consumers haven't changed their burrito-eating habits — in fact, they are visiting more often. But the "low-income consumer definitely has pulled back their purchase frequency," CEO Brian Niccol told analysts.
• Delta is seeing more of its customers trade up, with more demand for premium-class tickets than basic economy. Roughly 10% of its tickets last quarter were for its main cabin, while 90% were for higher-prices offerings. (Executives expected that split to be closer to 80/20).
• This split is apparent within malls, too: Simon Property, the largest owner of U.S. shopping malls, sees a subset of consumers reining in spending at brands like JCPenney. But there's been little impact at higher-end stores, like Brooks Brothers.