Markets Brace for Possible Rate Hike After Kevin Warsh’s Hawkish Turn

Kevin Warsh keeps flipping the script on markets.

The Federal Reserve chairman surprised investors Friday by signaling greater concern about inflation than many had anticipated, prompting a sharp increase in short-term U.S. Treasury yields, a more modest rise in longer-term bond yields and declines in major stock indexes.

Warsh’s suggestion that the Fed might have more “work to do” to fight inflation suddenly put a September interest-rate increase in play. Interest-rate futures showed traders now see a roughly 58% chance that the Fed will raise rates at its next meeting, up from 35% on Thursday, according to CME Group data.

The remarks eased concerns that Warsh might be reluctant to raise interest rates because of pressure from President Trump—a worry that had contributed to a recent rise in longer-term Treasury yields, which play a major role in determining borrowing costs across the economy.

At the same time, the message was so strong that it made some investors worry that Warsh had put the Fed in a difficult position where it now could face pressure to raise rates next month whether the economy demands it or not.

“You’ve essentially signaled to the market that the Fed more or less will deliver rate hikes,” said George Catrambone, head of fixed income Americas at DWS. “I’m just not sure that as the data comes in, that’s going to be the case.”

Raising rates could hurt the economy at a time when consumers have started to show some weakness, Catrambone said. But not raising rates could risk another selloff in longer-term bonds by resurfacing questions about Warsh’s credibility, he added.

Investors were hardly panicked by Warsh’s remarks, which were delivered at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo. The Dow Jones Industrial Average fell less than 0.1% and the S&P 500 declined 0.2%, while the Nasdaq composite dropped 0.5%.

Stock indexes fell much more sharply following Warsh’s two previous high-profile appearances as chairman, at postmeeting press conferences in June and July.

In the first of those cases, Warsh—who has said that he doesn’t want to give away too much about his interest-rate outlook—similarly surprised investors with his concern about inflation.

Then in July, he spooked markets for the opposite reason, making several statements that made investors question his willingness to back up his words on inflation with actual policy changes.

While stocks have otherwise continued climbing in recent months, there has been much more turmoil in the bond market. In the weeks following the July Fed meeting, the yield on the 30-year Treasury bond climbed above 5.3%—its highest level since 2007.

That prompted a surprise announcement from the Treasury Department last week that it would at least double purchases of longer term Treasurys as part of its pre-existing buyback program.

Though that program was started in 2024 to support trading in older, less liquid securities, Treasury Secretary Scott Bessent signaled in an interview with CNBC last week that the point of increasing buybacks was to lower longer-term bond yields, which he said didn’t reflect economic fundamentals.

After some initial volatility, his move appears to have had some success, with longer-term yields falling relative to short-term yields in recent days.

The yield on the 30-year U.S. Treasury bond settled Friday at 5.207%, down from 5.266% last Wednesday morning just before the Treasury Department’s announcement, according to Tradeweb. Still, the yield on the 10-year note, which has a bigger impact on mortgage rates and other borrowing costs, was 4.721%—up from 4.671% Thursday and 4.682% just before the buyback announcement.

Treasury yields, which rise when bond prices fall, largely reflect investors’ expectations for what short-term rates set by the Fed will average over the life of a bond. As a result, Fed rate hikes tend to push up yields on shorter-term Treasurys in particular. But they can also contain longer-term yields by reducing the threat of inflation and the possible need for much higher rates in the future.

Shares of companies tied closely to the economy’s ups and downs retreated on Friday: The Russell 2000 index dropped 1.4%, while the S&P 500 industrials sector slid 1%. While Warsh stopped short of committing to a hike at the Fed’s next meeting, the prospect of higher rates still dragged on stocks.

Warsh “left things highly uncertain,” said Tony Parish, chief investment officer at Alphastar Capital Management. “If there were any shifts in certainty, it was toward the possibility of rate hikes—which markets don’t particularly like.”

Equity investors haven’t reacted much to the recent turmoil in bonds, focusing instead on the end of another blockbuster earnings season—and potentially their summer vacations. Daily trading volumes this past week ranked among their lowest levels of 2026. Stocks did get a boost Thursday, after another blowout quarter from Nvidia quelled concern about cooling demand for AI chips. The S&P 500 is roughly 1% shy of all-time highs.

The start of September kicks off what has historically been a bumpy month for the stock market. Warsh’s speech left his options open and traders still relatively unsure where monetary policymakers will land at their next meeting on Sept. 16, said Kristian Kerr, head of macro strategy for LPL Financial

“There’s this element of still trying to figure [Warsh] out,” Kerr said. “That’s going to go on for a while.”