NEW YORK (AP) — The bond market swung Friday as investors made bets that the Federal Reserve could soon raise interest rates to rein in the country’s high inflation. Meanwhile, U.S. stocks fell, but not by much, after economists said a speech by Chairman Kevin Warsh helped strengthen faith that the Federal Reserve will do what is necessary to reduce inflation, even if it causes pain to the economy in the short term. The S&P 500 fell 0.2% after swinging between modest gains and losses during the morning. The Dow Jones Industrial Average fell 9 points, or less than 0.1%, and the Nasdaq composite fell 0.5%. Reaction was strongest in the bond market following Warsh’s first speech as Federal Reserve chairman at an annual economic symposium held in Jackson Hole, Wyoming. The mountain setting has been the backdrop for major Federal Reserve policy announcements in the past, and the pressure was on Warsh. Concerns had been growing that his tough talk about reducing inflation to the Fed’s 2% target could be just that, unless the Fed backs it up with action. The Federal Reserve could raise short-term interest rates to control inflation, but it also might be deterred from doing so because that would slow the economy and hurt investment prices. And President Donald Trump, who appointed Warsh, has expressed his desire for interest rates to be lower rather than higher. AP AUDIO: U.S. stocks are drifting after expectations rose that the Federal Reserve will raise rates to rein in inflation. Wall Street has been rising in early trading. Warsh was again adamant Friday that he wants to give financial markets fewer clues about what the Fed plans to do with rates for its twin jobs of keeping inflation low and the labor market strong. He has said he wants markets to react to what incoming data says about the economy and inflation rather than what the Federal Reserve says. But Warsh also said Friday that “short-term interest rates are the predominant tool” for the Federal Reserve to do its job. And he said, “I would be hard-pressed to describe overall financial conditions as tight,” implying that short-term interest rates may not be high enough to curb the economy and inflation. The two-year Treasury yield, which closely tracks expectations about what the Federal Reserve will do with its federal funds rate, jumped to 4.35% from 4.22% just before the speech. It’s a big move for the bond market, and it comes as traders increased their forecasts that the Federal Reserve will raise its federal funds rate as early as next month. They are now betting on a nearly 58% chance of that, up from 35% seen the day before, according to CME Group data. Subscribe to Morning Wire: Our flagship newsletter breaks down the day’s biggest headlines. Long-term yields also rose after some initial zigzags, but not as much as short-term yields. The 10-year Treasury yield rose to 4.72% from 4.67% late Thursday, and the 30-year Treasury yield hit 5.21% from 5.19%. All the moves, including modest ones for stocks, although higher interest rates tend to hurt them, indicate that investors are “pricing in a more credible Federal Reserve,” according to Bank of America economists led by Aditya Bhave. “The positive market reaction highlights that investors place a premium on policy clarity, even when that clarity comes with” a message that implies higher interest rates, according to Seema Shah, chief global strategist at Principal Asset Management. Longer-dated bond yields had risen so much this summer, partly due to concerns that inflation would remain high in the future, that the U.S. Treasury Department took an unusual step last week and said it would buy back more bonds, although analysts said it would likely have only a limited effect. On Wall Street, Gap rose 12.9% after the retailer reported higher-than-expected fourth-quarter profits than analysts expected. It also said Michael Francis, an industry veteran who began his career on the retail sales floor, will take over as director of its Old Navy stores. Marvell Technology fell 10.3% even though the chip company reported earnings and revenue for the latest quarter that beat analysts’ expectations. CEO Matt Murphy said its AI technology-related business is strong and raised his forecasts for upcoming revenue growth. But analysts said much of that optimism may have already been reflected in Marvell’s stock price, which came in today up 184% so far this year. After soaring for years due to the frenzy around AI, stocks across the industry are facing skepticism that they have soared too high and that growing demand for AI chips may fade if the AI revolution doesn’t produce as many profits as promised. In total, the S&P 500 fell 19.23 points to 7,711.76. The Dow Jones Industrial Average fell 9.45 to 53,559.99 and the Nasdaq Composite sank 138.93 to 26,402.42. In foreign stock markets, indices rose in much of Europe after a mixed finish in Asia. South Korea’s Kospi fell 1.8% and France’s CAC 40 rose 1%, in two of the biggest moves in the world. ___AP business writers Michelle Chapman and Elaine Kurtenbach contributed to this report.
