Traders piled into betting on interest-rate hikes as soon as next month after Kevin Warsh used his debut press conference as Federal Reserve chairman to make clear the central bank won't tolerate high inflation.
Two-year Treasury yields, which closely track expectations for monetary policy, steadied on Thursday at around 4.17% after shooting up 13 basis points on Wednesday. That was the biggest jump since April 2025 and matched the largest increase on a Fed meeting day since 2008.
The hawkish message was driven home by the projections of individual Fed members, half of whom expect to raise rates by the end of the year.
"We're getting a message very clearly from policymakers that the rates trajectory is not lower in the near term," said Kate Moore, chief investment officer of Citi Wealth.
Before Wednesday's meeting, Wall Street had largely assumed the Fed was done cutting rates ever since the Iran war's oil shock sent consumer prices surging by the most in three years.
But investors also wondered whether Warsh would give in to President Donald Trump, who elevated him to the central bank post after repeatedly lashing out at his predecessor, Jerome Powell, for not slashing borrowing costs enough.
Both questions appeared to be settled — at least for now — after Warsh spoke Wednesday. He even criticized the central bank for its forecasting with the pace of inflation remaining stuck over its 2% target since the pandemic.
"If nothing else, the market has renewed confidence in the Fed's inflation fighting ability and conviction," said Ian Lyngen, head of US rates strategy at BMO Capital Markets. "It was a good day for central banking independence."
Rob Kaplan, vice chairman at Goldman Sachs Group Inc. and former Dallas Fed president,
The Fed's message triggered waves of repositioning in markets as traders rushed to get ahead of its moves.
Futures traders solidified expectations for a quarter-point rate hike by October, just before the mid-term elections, if not sooner. And 30-year Treasury yields slipped to the lowest since late April, in a sign of faith that inflation will ultimately be contained over the long haul.
Still, the moves retraced slightly ahead of US markets opening on Thursday, as
The market reaction likely also stems from Warsh's refusal to deliver forward guidance about where central bankers think monetary policy is headed. He also slashed the length of the Fed's statement and declined to give a personal view on where rates are headed.
"Warsh regards market volatility as a price worth paying to get to the point at which the market forms an independent view of the appropriate rate path," said Krishna Guha, vice-chairman at Evercore ISI.
The movements cap what has been a stark shift in the market's expectations for the direction of interest rates over the past few months, one that's persisting even as oil prices pull back.
That's because energy prices have only been one factor keeping inflation stubbornly above the Fed's target. Job growth has picked up and the economy has remained surprisingly resilient, bucking periodic calls that a recession was on the horizon. The record-setting stock rally has bolstered consumer spending, helping to offset the hit of higher gas prices. And the artificial-intelligence boom has unleashed a flood of investment spending by big tech companies.
Warsh didn't commit to raising rates and indicated he saw little reason in trying to forecast such moves in advance. He also largely sidestepped a question on why the Fed didn't go ahead and raise rates now, given that inflation is so high, and characterized the bank's internal deliberations as "a good family fight."
James St. Aubin, chief investment officer at Ocean Park Asset Management, said Warsh was trying to strike a balance by reassuring the market that he won't jeopardize the Fed's credibility while, at the same time, not drawing Trump's ire. In that sense, Warsh didn't leave himself boxed in.
"He's really just trying to appease two masters," he said. "He's walking a fine line."
Warsh's takeover of the Fed came after it was subject to an unprecedented pressure campaign by the Trump administration, which included an effort to oust Governor Lisa Cook and a criminal investigation that Powell said was in retaliation for not bending monetary policy to the president's will.
Warsh was a staunch hawk during his term as Fed governor between 2006 and 2011, when the housing-market collapse drove the US into a deep recession. Yet he had gone on to become a fierce critic of the central bank and last year faulted it for continuing to forecast elevated inflation, saying AI will unleash a "significant disinflationary force" by increasing productivity, casting some doubts on his current views.
The position he staked out at his maiden press conference, though, underscored that the Fed's focus is shifting back to its mandate to combat inflation after nudging rates down in late 2024 and again at the end of last year.
"This was a very solid debut for Warsh," said Win Thin, chief economist at Bank of Nassau 1982. "The key takeaway is that the Fed has become much more willing to hike rates in the second half of the year."
