US stock markets experienced a slight downturn on Friday following Federal Reserve Chairman Kevin Warsh's speech at the Jackson Hole economic symposium. The S&P 500 fell 0.2% (19.23 points to 7,711.76), the Dow Jones Industrial Average dipped less than 0.1% (9.45 points to 53,559.99), and the Nasdaq composite slipped 0.5% (138.93 points to 26,402.42). These modest declines occurred as investors began to price in an increased likelihood of a Fed rate hike. Economists at Bank of America, led by Aditya Bhave, suggested that the "positive market reaction highlights that investors place a premium on policy clarity, even when that clarity carries" a message implying higher interest rates.
The bond market reacted more strongly to Warsh's remarks. The yield on the two-year Treasury note, which is sensitive to Fed policy expectations, soared nearly 8 basis points to 4.31%, marking its highest level since late July. Some reports indicated the yield reached 4.35% from 4.22% just before the speech. Traders significantly increased their bets on a rate hike at the September policy meeting, with probabilities rising to about 55.7% or nearly 58%, up from around 35-40% the previous day, according to CME Group's FedWatch tool.
Warsh's speech was perceived as more hawkish than his previous statements. He emphasized that the Fed has "work to do" if it's not confident that inflation is moving towards its 2% target "clearly and at sufficient speed." He noted that the labor market is stable, inflation remains too high, and financial conditions are not restrictive enough to tamp down the economy. While he avoided explicit forward guidance, his comments led analysts like those at Capital Economics to suggest that a rate hike could come sooner than their December forecast, especially if upcoming price data remain firm. Marvell Technology notably fell 10.3% despite beating profit and revenue expectations, citing strong AI-related business and raised future revenue forecasts.
