Fed Chair Warsh Opens Door to September Rate Hike as Inflation Stays Stubbornly High

Federal Reserve Chair Kevin Warsh delivered a distinctly hawkish message at the central bank's annual Jackson Hole symposium on Friday, signaling for the first time since taking office that a resumption of interest-rate hikes is a live possibility if inflation fails to return convincingly to the 2% target.

In his first high-profile speech since replacing Jerome Powell in late May, Warsh acknowledged that recent U.S. data show inflation has cooled a bit, but said "they do not tell me that underlying trends have meaningfully improved." He added: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

The remarks, reported by multiple outlets, immediately reshaped market expectations. According to CME FedWatch data, the probability of a rate hike at the Fed's Sept. 15-16 meeting jumped to roughly 60%, up from about 35% the day before. That effectively represents a coin flip, a stark shift from the roughly one-third odds priced ahead of Warsh's speech.

The two-year Treasury yield, which closely tracks expectations for the Fed's policy rate, rose from 4.22% to 4.30% on Friday, its biggest one-day move since June. Longer-dated yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors are not pricing in an extended tightening cycle.

**Equities Dip, Volatility Falls**

U.S. stocks initially held steady but turned lower as Warsh's message sank in. The S&P 500 slipped 0.13%, the Nasdaq Composite fell 0.30%, and the Dow Jones Industrial Average was flat. All three major indexes had been up roughly 0.5% before the speech, according to one financial publication.

Nvidia gave back roughly half of Thursday's post-earnings surge, falling 4% as richly valued growth stocks came under pressure. The iShares Semiconductor ETF dropped 3.3%.

Yet the Cboe Volatility Index (VIX) fell to as low as 14.1, its lowest reading all year, indicating that stock traders were not panicking about the hawkish turn. "The VIX is low because a Fed that is vigilant on inflation without having to hike aggressively is seen as positive for the economy," Ben Emons, managing director at Highline Asset Management, told CNBC.

Gold and bitcoin each dropped at least 2.5%, providing further evidence that investors across asset classes are pricing in higher interest rates.

**Inflation Still Above Target**

Warsh pointed to data showing inflation remains stubbornly above the central bank's 2% target. According to the Fed's preferred measure, inflation stood at 3.7% in July. He noted that 54% of goods and services tracked by the government have seen price increases of 3% or higher over the past year — well above the 32% that saw such increases in the two decades before the pandemic, Fortune and other outlets reported.

Warsh argued that inflation is unlikely to return to target on its own and said inflation data "are more concerning" than trends in the job market, where the unemployment rate is low. He also suggested that interest rates currently are not restricting economic activity, pointing to robust business investment in AI equipment and infrastructure and strong consumer spending.

**Clarity on Tools, Skepticism on Guidance**

Warsh used the speech to clear up confusion from a July 29 news conference, where he made vague remarks about what metric the Fed would use to track inflation and whether short-term rates were the central bank's main tool. On Friday, he specified that short-term interest rates are the Fed's "predominant tool."

He reiterated his skepticism about providing so-called forward guidance — detailed indications of the likely path of policy — arguing that it limits the Fed's flexibility. "A quieter Fed, a more purposeful Fed in its communications, is better able to meet its objectives," he said, according to a published transcript.

Jon Faust, an economist at Johns Hopkins and a former adviser to Powell, told several outlets that Warsh succeeded in conveying a tougher approach on inflation while avoiding the kind of detailed guidance he has disparaged. "He found a way to convey that if necessary he would support raising rates, which is one thing people were concerned about," Faust said.

But Michael Strain, director of economic policy studies at the American Enterprise Institute, cautioned that the Fed chair has talked tough on inflation before without hiking rates, and that Friday's remarks do not provide clearer guidance on the timing of any moves.

**Political Crosscurrents**

Warsh's hawkish stance comes against a backdrop of political pressure from President Donald Trump, who has continued to call for lower interest rates. While Trump has defended Warsh, whom he appointed, the president has criticized other Fed officials for supporting higher rates and has renewed efforts to remove Fed Governor Lisa Cook, a Biden appointee. Replacing Cook would give Trump a majority of the seven-member board, Channel NewsAsia and other outlets reported.

The speech also highlights a contrast with Treasury Secretary Scott Bessent, who last week intervened in the bond market by announcing a doubling of purchases of long-term government bonds for two months starting Sept. 9. Bessent's move came after the 30-year Treasury yield hit a 19-year high. While Bessent works on long-term rates and Warsh on short-term rates, the two are related, and Fed policy over time tends to affect long-term yields.

**No Imminent Move, But Door Now Open**

Warsh did not imply that a rate hike is imminent at the September meeting, and the Fed's next policy decision remains genuinely uncertain. But he dismissed the perception that inflation is no longer a threat. As one economist quoted by Fortune put it: "He found a way to convey that if necessary he would support raising rates, which is one thing people were concerned about."

For markets, the key takeaway is clear: rate cuts are off the table for 2026, and the possibility of further tightening is back on it. The close of August, as one analyst noted, serves as a reminder that strong earnings and a hawkish Fed can pull in opposite directions. Nvidia's results didn't change, but the financing-rate backdrop did.