The two-year Treasury yield jumped to 4.35% from 4.22% in the minutes around a speech by Fed Chair Kevin Warsh on Friday. That is a big move for the bond market. Traders took it as a cue that the Federal Reserve may raise rates as soon as next month.
CME Group data put the odds of a hike at nearly 58%, up from 35% a day earlier. The two-year yield tracks expectations for the Fed’s federal funds rate closely, which is why it reacted most.
Longer maturities moved less. The 10-year yield rose to 4.72% from 4.67% late Thursday, and the 30-year reached 5.21% from 5.19%.
Stocks barely flinched. The S&P 500 slipped 0.2% after swinging between small gains and losses through the morning. The Dow lost 9 points, less than 0.1%, and the Nasdaq composite fell 0.5%. Economists said the speech helped restore faith that the Fed will do what it takes to bring inflation down, even if the economy feels some pain in the short run.
A first speech under pressure
Warsh spoke at the annual economic symposium in Jackson Hole, Wyoming, the setting for major Fed policy announcements in the past. It was his first address as chairman. Worries had been building that his tough talk on getting inflation back to the Fed’s 2% target would stay just talk unless the central bank acted.
There is a reason the Fed might hold off. Higher short-term rates slow the economy and hurt prices for investments. President Donald Trump, who appointed Warsh, has said publicly that he wants rates lower, not higher.
Warsh did not give much away on timing. He repeated that he wants to offer markets fewer clues about what the Fed plans to do, and that he wants them to respond to incoming data on the economy and inflation instead. Still, he said “short-term interest rates are the predominant tool” for the Fed’s two jobs of keeping inflation low and the job market strong.
He also said, “I would be hard pressed to describe broad financial conditions as restrictive.” Read one way, that suggests current short-term rates may not be high enough to cool the economy and inflation.
