Warsh's Hawkish Speech Sinks Stocks, Reverses Morning Gains

Federal Reserve Chair Kevin Warsh's hawkish speech at Jackson Hole, Wyoming, sent shockwaves through US stock markets on Friday. The Dow Jones Industrial Average finished flat, while the S&P 500 fell 0.13% and the Nasdaq Composite dropped 0.30%. This came after a morning where all three indices were up around 0.5%, but Warsh's words reversed those gains.

Warsh emphasized that inflation is running too high and price stability takes priority, stating 'price stability comes first' and that the Fed needs to see prices falling 'clearly and at sufficient speed.' This suggests rate cuts are off the table for now, but potential hikes are back in consideration. The odds of a September rate increase firmed up from 40% to roughly a coin toss.

The two-year Treasury yield jumped about 0.1 point, its biggest one-day move since June. Richly valued growth stocks were hit hard, with Nvidia down 4% and the iShares Semiconductor ETF falling 3.3%. However, exactly half of the 30 Dow stocks rose, including Apple, which gained 1.9% after announcing significant price increases for its services.

The market had been quietly betting on rate cuts, but Warsh's speech changed that narrative. The reversal underscores how much the market depends on the rate outlook, and long-term investors should be aware of this dynamic.