Bond Market Reacts Strongly to Warsh's Credible Fed Statement

The bond market reacted strongly to Federal Reserve Chairman Kevin Warsh's speech at the annual economic symposium in Jackson Hole, Wyoming. The two-year Treasury yield jumped to 4.35% from 4.22%, a big move that indicates investors are pricing in a more credible Fed.

Warsh emphasized the importance of getting inflation down to the Fed's 2% target and said 'short-term interest rates are the predominant tool' for achieving this goal. He also stated that he would be hard pressed to describe broad financial conditions as restrictive, implying that short-term interest rates may not be high enough.

Traders upped their forecasts that the Fed will hike its federal funds rate next month, with a nearly 58% probability, up from 35% the day before. This move in the bond market was reflected in stocks, which dipped modestly, with the S&P 500 falling 0.2% and the Dow Jones Industrial Average dipping less than 0.1%.