Surging Treasury yields pose a brand new problem for Kevin Warsh and the Fed

The bond market is yelling at the Federal Reserve, but the messages are coming from different directions and pose a dilemma for policymakers as they seek to strike a balance that won't tank the economy.

Treasury yields continued their upward march Thursday as investors sought to price in a variety of factors: inflation still hovering well above the Fed's 2% goal, another bump up in energy prices and the impact of a global hyperscaler financial arms race and accompanying debt issuance.

In the past, policymakers have been willing to look through inflation spurts from temporary shocks like high energy prices and tariffs. And the narrative not so long ago was that the artificial intelligence investing boom was a story that would last a year or two and ultimately prove disinflationary.

But now Fed officials are rethinking the impact of those factors and seeing the danger of more durable inflation.

At the same time, markets are grappling with a central bank that suddenly has no interest in telegraphing its next moves, leaving an uncertain calculus on who is calling the shots — policymakers or market players.

"The time of looking through the initial supply shock has come to an end," said Joseph Brusuelas, chief economist at RSM. "The bias has to be towards restoring price stability, and they should take what's going on seriously."

Markets expect the central bank will indeed take a firmer hand on inflation.

Over the past day or so, traders raised the odds of a rate hike in October, which would come only a month or so after last week's quarter percentage point increase . They also see a third increase either late this year or early in 2027, with additional hikes possible in subsequent months.