Warsh's Rate Hike Hint Sends US Stocks Drifting Lower
US stocks remained relatively stable on Friday, despite rising expectations for the Federal Reserve to raise interest rates soon. The S&P 500 fell 0.3%, while the Dow Jones Industrial Average was down 50 points (0.1%) and the Nasdaq composite lost 0.5%.
The bond market reacted more significantly after Kevin Warsh's speech at an annual economic symposium in Jackson Hole, Wyoming. The pressure was on Warsh to outline a clear plan for getting inflation under control, which could involve raising short-term interest rates.
Warsh emphasized that he wants markets to react to incoming data rather than Fed announcements, but also stated that short-term interest rates are the 'predominant tool' for keeping inflation low and the job market strong. He added that broad financial conditions may not be restrictive enough, implying a potential rate hike soon.
The yield on the two-year Treasury jumped to 4.34% from 4.22% before Warsh's speech, and traders now see a nearly 60% probability of a Fed rate hike next month, up from 35% earlier in the day.