As Nomura’s Charlie McElligott pointed out in a note published Wednesday morning, markets are now bracing for the possibility of a “hard landing” for the U.S. economy, as investors wake up to the reality that inflation will be much more stubborn than they had expected.

Others pointed out that investors are being disabused of their belief in “peak inflation” — the notion that price pressures have already peaked now that energy prices have fallen from their highs seen earlier this year — and are now being forced to confront the fact that other factors, like the rising cost of rent, will be far more stubborn, meaning the Fed will need to keep interest rates higher for longer.

“I think some investors were lulled into the sense that inflation might be coming down fast because of the quick drop in energy prices that played a role in that thinking,” said Mohannad Aama, a portfolio manager at Beam Capital.

“The Fed has unemployment and the shelter component of CPI in their cross hairs,” he added.

See: U.S. inflation roars back in August, CPI shows, despite falling gas prices

Ahead of Tuesday’s consumer-price index report, economists had expected that the drop in energy prices would cause headline inflation to be essentially steady.

Instead, a surprisingly large increase in the cost of rent and owners’ equivalent rent caused “core” inflation — a measure of inflation that strips out volatile food and energy prices — to rise by 0.6% in August, double the prior month’s increase, and also double the 0.3% anticipated by a survey of economists published by the Wall Street Journal.

See:U.S. gains 315,000 jobs in August. Labor market still strong but shows sign of cooling

Derivatives traders are already pricing in the likelihood that inflation will be harder to fight. According to CME’s FedWatch tool, they now see nearly 30% odds that the Fed’s benchmark interest-rate target will rise as high as 4.5% in July, and a 15% chance that it could be as high as 4.75%.

What’s more, traders are now pricing in nearly 30% odds that the Fed will need to hike by a full percentage point when it meets next week, something the investment bank Nomura, McElligott’s employer, is already expecting.

See: The biggest Fed rate hike in 40 years? It could be coming next week

As McElligott explains, higher interest rates are bad news for stocks since they will likely hurt consumption and capital expenditures by companies, ultimately manifesting in the form of slower economic growth and lower corporate earnings.

According to the CPI data released Tuesday, the cost of both rent and owners’ equivalent rent — which the Fed uses to represent the costs associated with owning a home — rose 0.7% in August.

Fed Chairman Jerome Powell has made it very clear that the Fed wants to see the rising cost of housing abate before the Fed shifts back toward easier monetary policy.

To be sure, others are worried that the Fed risks being too aggressive.

Kristina Hooper, the chief global strategist at Invesco, said in an email that she’s worried “75 is the new 25” — meaning that the Fed could risk causing unnecessary economic damage by continuing to dole out jumbo-size rate hikes.

“The impact of rate hikes takes time to show up in economic data. And so I fear that any central bank that hikes rates in 75 basis point increments is turning monetary policy into an even more blunt instrument, and runs the risk of overdoing it,” Hooper said in emailed comments.

Aama agreed that it’s possible the economy could see an even more severe downturn before the full impact of Fed interest-rate hikes are felt. But that doesn’t mean the central bank should hold back, he said.

“Just like the Fed was late in hiking and let inflation out of the bag, more aggressive hikes may end up doing too much damage before the full impact of prior hikes have been felt,” he said.

The unfortunate reality is that “peak inflation” is one of those things that can only be ascertained in hindsight, Aama said.

So far, U.S. stocks have struggled to shake off the effects of Tuesday’s carnage. The S&P 500
SPX,
+0.34%
is marginally lower on the day in afternoon trade, while the Nasdaq Composite
COMP,
+0.74%
and Dow Jones Industrial Average
DJIA,
+0.10%
are up 0.2%.