The debate on Wall Street over the prospects for the American economy moved decidedly back toward the gloomy this week, as investors again recalibrated their expectations for how high interest rates could go.

The shift came after the Federal Reserve’s chair, Jerome H. Powell, speaking to lawmakers on Tuesday, said the central bank might have to raise interest rates more than it expected, and possibly at a faster clip. But as interest rates carve a steeper path ahead, some investors are predicting that the Fed won’t be able to beat inflation without first setting off a recession.

Coming into the year, investors were growing hopeful that inflation had peaked and that the Fed’s campaign of raising interest rates, which slows economic demand but can also weigh on the stock market, would soon end. But a consistent stream of data showing that the economy continues to run hot has reignited fears of rates rising even further than previously thought.

“It’s my view that recession is the Fed’s policy at this point,” said Lauren Goodwin, an economist at New York Life Investments. “Chair Powell has been saying consistently that when inflation is high the economy doesn’t work for anyone. In order to bring inflation back to where the Fed will be comfortable with a stable economic backdrop, we have to have a recession first.”

These circumstances make Friday’s report on the labor market a critical data point. When coupled with next week’s reading on consumer price inflation, the jobs report could help solidify views of whether the Fed will raise rates by either a quarter of a percentage point or half a percentage point when it meets later this month.

A weak showing by the job market in February — economists are forecasting that the economy added 225,000 jobs last month — could add to the case that the Fed should take it slow, to see if the string of rate increases made so far is taking effect. But if hiring occurred at a much faster pace than expected, or if wages jumped, the Fed might be compelled to increase rates more quickly.

The swing in Wall Street’s thinking this week was evident in the yield on two-year U.S. government bonds. The yield, which closely tracks expectations for interest rates, shot higher after Mr. Powell’s testimony to Congress, rising above 5 percent for the first time since mid-2007. By Thursday evening, the yield had fallen to 4.87 percent.

The move in the stock market wasn’t quite so dramatic, though selling did pick up over the course of the week. Before Friday’s trading began, the S&P 500 had fallen more than 3 percent for the week, though a slide in bank stocks over concerns about a California bank’s ability to withstand the effects of higher interest rates was a big factor on Thursday.

There are, though, some reasons for stock investors to remain optimistic.

When the two-year yield rose sharply this week, investors’ expectations of inflation for the same time period actually fell. That suggests a belief among investors that the Fed will manage to lower inflation over time, even though rates will have to keep going higher to achieve that end, said Brad McMillan, the chief financial officer at Commonwealth Financial Network.

“I see the market saying the Fed is doing what they need to do,” said Mr. McMillan. He noted that the yield on 10-year Treasury notes — which reflects longer-term predictions for growth and inflation — had remained relatively stable in recent weeks.

That suggests some bond investors are predicting that longer-term rates will fall and that inflation will eventually be brought under control. Both moves would be positive for the stock market over time.

“Rates will go higher in the short term, but, ultimately, markets expect the Fed to get inflation under control,” Mr. McMillan said.

Some investors pointed to cracks emerging in other areas of the global economy as well, suggesting that the effects of rising interest rates are taking hold, even if they are taking some time to show up in the data.

“I do think things are slowing down, and that the Fed will pause sooner than the market is expecting,” said Andrew Brenner, the head of international fixed income at National Alliance Securities. “But it doesn’t look like there is any scenario in which the Fed doesn’t raise rates in March.”