The bond market prepares for a hike to interest rates, while US stocks
drift lower
[August 29, 2026] By
STAN CHOE
NEW YORK (AP) — The bond market swung Friday as investors built bets
that the Federal Reserve may hike interest rates soon to get the
nation’s high inflation under control. U.S. stocks, meanwhile, dipped
but not by much after economists said a speech by Chairman Kevin Warsh
helped strengthen faith that the Fed will do what’s needed to bring
inflation down, even if it causes pain for the economy in the short
term.
The S&P 500 fell 0.2% after flipping between modest gains and losses
through the morning. The Dow Jones Industrial Average dipped 9 points,
or less than 0.1%, and the Nasdaq composite slipped 0.5%.
The reaction was stronger in the bond market following Warsh’s first
speech as chairman of the Fed at an annual economic symposium held in
Jackson Hole, Wyoming. The mountain setting has been the backdrop for
major Fed policy announcements in the past, and the pressure was on
Warsh.
Worries had grown that his tough talk about getting inflation down to
the Fed’s 2% target may be just that, unless the Fed backs it up with
action. The Fed could hike short-term interest rates to get inflation
under control, but it could also feel deterred from doing so because
that would slow the economy and hurt prices for investments. And
President Donald Trump, who appointed Warsh, has been vocal about
wanting interest rates to be lower rather than higher.
Warsh was adamant again on Friday that he wants to give financial
markets fewer clues about what the Fed plans to do with rates for its
two jobs of keeping inflation low and the job market strong. He has said
he wants markets to react to what incoming data says about the economy
and inflation rather than what the Fed says.
But Warsh also said Friday that “short-term interest rates are the
predominant tool” for the Fed to do its job. And he said, “I would be
hard pressed to describe broad financial conditions as restrictive,” an
implication that short-term interest rates may not be high enough to
tamp down the economy and inflation.
The yield on the two-year Treasury, which closely tracks expectations
for what the Fed will do with its federal funds rate, jumped to 4.35%
from 4.22% just before the speech.
That’s a big move for the bond market, and it was because traders upped
their forecasts that the Fed will hike its federal funds rate as soon as
next month. They’re now betting on a nearly 58% probability of that, up
from the 35% seen a day earlier, according to data from CME Group.
Longer-term yields also rose following some initial zigzags, but not by
as much as shorter-term yields. The 10-year Treasury yield climbed to
4.72% from 4.67% late Thursday, and the 30-year Treasury yield got to
5.21% from 5.19%.
All the moves, including the modest ones for stocks even though higher
interest rates tend to hurt them, indicate investors “pricing a more
credible Fed,” according to economists at Bank of America led by Aditya
Bhave.
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Options trader Matthew Hefter works on the floor of the New York
Stock Exchange, Thursday, Aug. 27, 2026, in New York. (AP Photo/Yuki
Iwamura)
 “The positive market reaction
highlights that investors place a premium on policy clarity, even
when that clarity carries” a message implying higher interest rates,
according to Seema Shah, chief global strategist at Principal Asset
Management.
Yields had gotten so high for longer-term bonds this summer, in part
because of worries about inflation staying high in the future, that
the U.S. Treasury Department made an unusual move last week and said
it would buy back more bonds, though analysts said it will likely
have only a limited effect.
On Wall Street, Gap jumped 12.9% after the retailer reported
stronger profit for the latest quarter than analysts expected. It
also said Michael Francis, an industry veteran who began his career
on the retail sales floor, will take over as head of its Old Navy
stores.
Marvell Technology fell 10.3% even though the chip company reported
profit and revenue for the latest quarter that edged past analysts’
expectations. CEO Matt Murphy said its business related to
artificial-intelligence technology is strong, and it raised its
forecasts for upcoming revenue growth.
But analysts said much of that optimism may have already been baked
into Marvell’s stock price, which came into the day with a surge of
184% for the year so far.
After rocketing higher for years because of the frenzy around AI,
stocks across the industry are confronting skepticism that they shot
too high and that booming demand for AI chips may fade if the AI
revolution does not produce as much profit as promised.
All told, the S&P 500 fell 19.23 points to 7,711.76. The Dow Jones
Industrial Average dipped 9.45 to 53,559.99, and the Nasdaq
composite sank 138.93 to 26,402.42.
In stock markets abroad, indexes rose across much of Europe
following a mixed finish in Asia. South Korea’s Kospi fell 1.8%, and
France’s CAC 40 rose 1% for two of the world’s bigger moves.
___
AP Business Writers Michelle Chapman and Elaine Kurtenbach
contributed to this report.
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