Backing away from the inflation fight too soon would be a recipe for disaster.

That’s according to Tom Barkin, who spoke Wednesday following what might fairly be described as the first convincing evidence of disinflation the Fed has seen this cycle.

June’s US CPI report, and particularly signs of progress on key “supercore” measures, presented the Fed with a new communications challenge — namely, convincing markets not to get ahead of themselves.

The dollar’s precipitous drop conjured memories of a fateful session in November, and the price action in rates was indicative of a latent zeal to trade the end of hikes. Two-year yields, which hit new cycle highs just days ago, dove.

A pair of block buys in two-year note futures gave the front-end rally some “oomph.”

At the highs last week, two-year yields were around 5.10%. On Wednesday afternoon in the US, they were 4.74%.

The 5s30s re-steepened sharply, as policy-sensitive yields plunged ~17bps, while the long-end rallied a comparatively tame 7bps.

Again, these are dovish reactions, and they underscore the extent to which CPI prints like June’s will excite market participants eager for the end of the most aggressive hiking cycle many traders have seen in their professional careers — or even in their lifetimes.

Don’t expect Fed officials to wittingly play along, though. As Barkin emphasized, “inflation is too high.” “If you back off too soon, it comes back strong, which then requires the Fed to do even more,” he said.

Neel Kashkari, meanwhile, warned banks to prepare for the possibility that the Fed might be compelled to trade a little financial instability for disinflation if push came to shove. “If inflation proves to be more entrenched than expected, policy rates might need to go higher, which could further reduce asset prices,” he wrote, in an essay. “In such a scenario, policymakers could be forced to choose between aggressively fighting inflation or supporting bank stability.”