Warsh's hawkish remarks eased doubts about the Fed's resolve to combat inflation, causing short-term bonds to plunge and gold to fall more than 2% intraday.

Federal Reserve Chairman Kevin Warsh's hawkish remarks at the Jackson Hole symposium on Friday quickly reverberated through the financial markets.

He warned that if underlying inflation does not fall clearly and quickly enough toward the 2% target, the Fed "still has work to do." The market immediately raised its expectations for future short-term interest rates, causing short-term U.S. Treasury prices to plummet, short-term yields to surge, the dollar to strengthen, gold to fall sharply, and economically sensitive stocks, small-cap stocks, and transportation stocks to come under pressure.

Overall, while Warsh's first appearance at Jackson Hole didn't directly announce an interest rate hike, his assessment of inflation and the financial environment significantly increased market sensitivity to future short-term interest rates. The market is simultaneously trading on two themes: firstly, the Fed's determination to combat inflation has been reaffirmed; secondly, higher interest rates may put pressure on economic growth and cyclical assets.

The yield on two-year U.S. Treasury bonds rose by as much as 10 basis points during the session.

The U.S. Treasury market reacted immediately after Warsh's speech.

The yield on the two-year U.S. Treasury note, which is sensitive to interest rates, rose as much as 10 basis points to 4.33% during the day. In contrast, the reaction of long-term U.S. Treasury yields was relatively mild, with the market mainly repricing the policy path for the next few FOMC meetings.

The two-year Treasury yield is highly sensitive to expectations of Federal Reserve policy, so this movement means that traders are quickly translating Warsh's hawkish remarks into expectations of higher short-term policy rates.

In his speech, Warsh particularly emphasized that short-term interest rates remain the primary tool for achieving the Fed's dual mandate: "Short-term interest rates are the primary tool for achieving the dual mandate."

At the same time, he said that unconventional policies can be applied during genuine crisis periods, but should be used cautiously or not at all in other situations.

Therefore, compared to previous market speculation that the Federal Reserve might rely more on unconventional tools such as its balance sheet, Warsh clearly shifted the policy focus back to short-term interest rates .

Warsh described the financial environment as "unrestricted," leaving room for short-term interest rates to rise.

Another important factor driving up US Treasury yields is Warsh's assessment of the current financial environment.

He stated, "It's difficult for me to describe the overall financial environment as restrictive."

Warsh points out that U.S. corporate capital expenditures are strong, a significant portion of which is related to AI infrastructure; corporate profits are growing by about 20%, credit spreads are at a low level, bank lending standards are relatively lenient, and private domestic final purchases are growing at nearly 3%.

Meanwhile, the unemployment rate is around 4.1%, and the number of initial jobless claims remains at a low level.

Therefore, in Warsh's view, the US economy has not shown any signs of being significantly suppressed by the current interest rate level.

This assessment is particularly important for the bond market: if financial conditions are not tight, economic growth remains resilient, and inflation fails to return to 2% for an extended period, then the market will naturally increase its expectations that the Federal Reserve will continue to maintain high interest rates or even raise rates further.

The dollar rose to its highest level in more than a week, while gold fell more than 2% during the session.

The dollar was also boosted by Warsh's hawkish remarks.

The Bloomberg Dollar Spot Index rose to its highest level in over a week. The market believes that Warsh's reaffirmation of the "firm and unwavering" 2% inflation target, while clearly stating that recent inflation data is insufficient to demonstrate a meaningful improvement in the underlying trend, reinforces expectations that the Federal Reserve will maintain higher interest rates or even raise them further.

Spot gold prices quickly turned lower and continued to decline after Warsh's speech, with the daily decline widening to over 2% by the end of the morning session in the US stock market.

Media reports described Warsh's speech as hawkish, noting that higher interest rates mean a higher opportunity cost of holding gold, a non-interest-bearing asset.

From the perspective of asset price linkages, Warsh's speech formed a very clear trading chain: rising expectations of interest rate hikes → rising short-term US Treasury yields → stronger US dollar → pressure on gold.

Economically sensitive stocks came under pressure, while small-cap and transportation stocks declined.

Compared to bonds, the US dollar, and gold, the overall reaction of US stocks was relatively mild, but there was significant divergence within the sector.

Shares of companies closely linked to the health of the economy weakened after Warsh's speech raised market expectations for higher interest rates, with small-cap and transportation stocks both declining .

The underlying logic is that higher interest rates will not only increase corporate financing costs but also increase borrowing costs for American consumers, which could weaken corporate investment, consumption, and overall economic growth.

Therefore, compared to large companies with stronger profitability, cash flow, and market pricing power, small-cap stocks and transportation stocks, which are more sensitive to economic cycles, are more vulnerable to shocks .

This performance also echoes the US Treasury market: the market did not fully bet on an economic recession because of Warsh's speech, but it has begun to repric the risk that "higher interest rates mean pressure on economic growth".

However, the US stock market did not experience a significant sell-off. Reuters reported that the Dow Jones, S&P 500, and Nasdaq indices still rose slightly that day, supported by the performance of large-cap technology stocks.

This means that the market impact of Warsh's speech is currently concentrated on interest rate-sensitive assets and economic cycle-sensitive sectors , and has not yet evolved into a comprehensive shock to the risk appetite of the entire US stock market.

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