As the Fed wages war on inflation, a new line is beginning to take hold among Democrats: interest rate hikes could be counterproductive.

Why it matters: The White House put the Fed front and center to contain soaring costs, but some prominent lawmakers on the left are not sold on the Fed's aggressive path.

• They fear the Fed's rate hikes could force a recession and push Americans out of work.

What they're saying: "Democrats have been pushing the Fed to get inflation under control. But now it's a question of, 'What are the economic consequences of doing that?'" says Ed Mills, a Washington policy analyst at Raymond James.

What's going on: During an intense exchange with Sen. Elizabeth Warren (D-Mass.) yesterday, Fed chair Jerome Powell admitted that interest rate hikes won't bring down costs for food and gasoline.

• Warren and other Democratic lawmakers pressed Powell on the possibility that rate hikes will cause companies to pull back on investment, potentially making supply problems worse.
• "Energy is still energy. The supply chain is still the supply chain. Russia's invasion of Ukraine is a continuing challenge for the world. There is nothing about interest rates that's going to affect any of that," Sen. Bob Menendez (D-N.J.) said.

Meanwhile, Powell and the Fed remain under pressure in the other direction from Republicans, who have assailed the central bank for not moving more aggressively to withdraw monetary stimulus last year, contributing to high inflation.

The big picture: The Fed is using its primary tool — higher interest rates — to tackle fast-rising prices. It's hoping to cool down the economy, without tanking it altogether.

• "I know higher interest rates are painful, but that's the tool we have to get demand and supply back into balance so that inflation can come down," Powell told senators yesterday.

Between the lines: The Fed can't control soaring costs for food or gasoline, but with inflation already high, it is set to be more reactive to headline inflation than usual.

• Rising grocery and gas bills are creeping into households' expectations of future inflation — something Fed officials are dead set on preventing.
• "Expectations are very much at risk due to high headline inflation," Powell warned last week. He noted the public doesn't distinguish between overall and core inflation, which strips out energy and food costs, when setting expectations.

The bottom line: Democrats acknowledge the pain of soaring inflation but don't want efforts to tackle it to wipe out economic gains — and that will put the Fed under intense political cross-pressures in the months ahead.

Blink and you'll miss it: We're in a new micro-cycle of the economic narrative, with market moves shifting the conversation in a new direction.

Driving the news: Bond and commodity prices are tilting away from a "stagflation" story of high prices and slowing growth, tilting the narrative toward a more conventional recession in which inflation and growth fall in tandem.

Why it matters: A few days of market fluctuations don't mean much in the grand scheme of things. But the recent action does signal a notable change in how global traders with big money on the line see the likely economic path ahead.

State of play: The two-year Treasury yield has fallen from a recent high of 3.44% on June 14 to 2.91% this morning. This implies the Fed will have to back off its rate-raising plans sooner than seemed likely last week, which is what it would do if inflation comes down and the economy takes a dive.

• Since reaching a multi-decade high in April, Treasury "breakevens" — the rate of future inflation implied by the relative prices of inflation-protected versus regular bonds — have fallen sharply. Inflation of 2.53% per year over the next decade is now priced in, down half a percentage point from the spring.
• Meanwhile, U.S. crude oil is down about 13% from its recent high on June 9, suggesting markets are pricing in lower demand (another feature of a weak economy).

The bottom line: The recent moves could unwind as quickly as they happened. Yet for now, prices are baking in slumping growth and diminishing price pressures.