Dollar rallies as Fed chief boosts rate-hike expectations

Wall Street ended lower Friday after Federal Reserve chief Kevin Warsh struck a more hawkish tone on inflation, while the US dollar strengthened as investors raised bets that the central bank could keep interest rates higher or even consider a September hike.

Speaking at the closely watched Jackson Hole symposium in Wyoming, Warsh said the Fed must see convincing evidence that underlying inflation is moving toward its 2% target before easing policy further.

His comments pushed up yields on short-term US Treasury bonds, which are particularly sensitive to expectations for Fed policy. Futures markets subsequently increased the probability of a rate hike in September.

US inflation is currently running at 3.7%, well above the Fed’s 2% target. Investors are also concerned that elevated energy prices linked to the Iran war could keep inflation high as winter approaches.

Warsh said the US economy was performing strongly and employment remained healthy, but warned that the inflation side of the Fed’s mandate was more troubling.

The comments weighed on US equities later in the session. 

The S&P 500 fell 0.3%, while the Nasdaq declined 0.5%. 

The Dow Jones Industrial Average was down less than 0.1%.

Stephen Brown, an economist at Capital Economics, described Warsh’s speech as a significantly clearer and more hawkish message than his previous appearance in July. 

He said rate increases were not certain but could be considered if economic growth remained strong and inflation stayed elevated.

The dollar gained broadly against major currencies following the speech. 

The euro fell to $1.1586 from $1.1653, while the dollar rose to 160.07 yen from 159.39 yen.

European markets moved in the opposite direction, with the CAC 40 in Paris gaining 1% and Frankfurt’s DAX rising 0.8%. 

London’s FTSE 100 added 0.3%.

Asian markets were mixed. 

Tokyo and Hong Kong advanced, while Seoul and Shanghai edged lower as technology stocks struggled to maintain the previous day’s rally following Nvidia’s strong earnings and outlook.

Oil prices ended slightly lower as traders assessed uncertainty surrounding the possible reopening of the Strait of Hormuz and continued US pressure on Iran. 

Brent crude fell 0.4% to $89.31 a barrel, while West Texas Intermediate declined 0.2% to $83.40.