Warsh's Hawkish Remarks Shock Financial Markets... Treasury Yields Jump, Stocks Fall

[Financial News]  

Kevin Warsh, chairman of the Federal Reserve System (FRS), threw a stone into the financial markets on the 28th (local time). He said he could not be satisfied with the current inflation trend and that the Fed would have to act if there was no further improvement, sharply heightening market concerns about rate hikes.
According to various prediction markets and the CME Group Inc.'s FedWatch Tool, the probability that the Fed will raise rates by 0.25 percentage point at the Federal Open Market Committee (FOMC) meeting on Sept. 15-16 next month is nearing or exceeding 50%. The FedWatch Tool showed a 56% chance of a hike.
After the employment shock earlier this month, inflation appeared to have slowed in July's Consumer Price Index (CPI) and Producer Price Index (PPI), and the core Personal Consumption Expenditures Price Index (PCE), which the Fed uses as its inflation benchmark, also came in line with expectations last month. That had shifted sentiment toward a rate hold, but Warsh's remarks quickly reversed that mood.
The market took a major hit after Warsh said in the keynote speech on the second day of the Fed's annual summer Jackson Hole Symposium that "there is still work to be done."
Treasury yields surged across the board.
The yield on the two-year U.S. Treasury note, which reflects market expectations for Fed policy, jumped 0.118 percentage point to 4.35%. It hit its highest level in about a month.
Yields on the 10-year and 30-year notes, which had recently turned weaker, also rebounded sharply.
The benchmark 10-year yield rose 0.052 percentage point to 4.724%, while the 30-year yield, a key gauge for long-term rates, climbed 0.02 percentage point to 5.211%.
In a note, BMO U.S. rates strategist Veil Hartman said Warsh's comments were deliberately hawkish and underscored that the Fed is willing to raise rates to stabilize inflation.
New York stocks turned lower again just one day after rebounding.
All three major indexes fell, led by technology stocks that are highly sensitive to interest rate outlooks.
Semiconductor shares were hit especially hard.
The iShares Semiconductor ETF plunged more than 3%.

[email protected] Song Kyung-jae Reporter