Bond Market Reacts as Fed Signals Rate Hike to Tame Inflation

The US bond market reacted strongly to Fed Chairman Kevin Warsh's speech at an economic symposium in Jackson Hole, Wyoming. The two-year Treasury yield jumped to 4.35% from 4.22%, indicating that investors are betting on a rate hike soon to combat high inflation.

Warsh emphasized the importance of short-term interest rates in controlling inflation and maintaining a strong job market. He stated that 'short-term interest rates are the predominant tool' for the Fed to achieve its goals, implying that rates may not be high enough to tame the economy and inflation.

The speech boosted faith in the Fed's commitment to tackling inflation, with investors pricing in a nearly 58% probability of a rate hike as soon as next month. This increase from 35% just a day earlier suggests growing confidence in the Fed's actions.

The Australian sharemarket is expected to follow suit, with futures pointing to a fall of 36 points, or 0.4%, at the open. The Aussie dollar was trading at US71.60¢.