Warsh Inflation Warning Spurs Global Stock Rally Amid US Rate-Hike Bets

Stocks rallied globally on Friday after Federal Reserve chairman Kevin Warsh's inflation warning boosted expectations for higher US interest rates. The FTSE 100 index closed up 31.72 points, or 0.3%, at 10,824.26, while the Cac 40 in Paris rose by 1%. In London, defence stocks were among the worst performers amid uncertainty over government spending.

The Fed's hawkish stance was evident in Warsh's comments, which stated that policymakers must be confident that inflation is slowing before taking action. He emphasized that the economy appeared to have strengthened and labour markets are consistent with full employment, but expressed concern about price stability.

This sent a signal to investors, leading them to price in 53bp of policy tightening over the next 12 months, up from 45bp beforehand. The two-year Treasury yield rose to 4.30% following the speech, while longer-term yields narrowed. In New York, equity markets reacted positively, with the Dow Jones Industrial Average rising by 0.4%, and the S&P 500 index increasing by 0.5%.