Federal Reserve chairman Kevin Warsh surprised investors Friday by signaling greater inflation concern than anticipated, sparking a sharp rise in short-term U.S. Treasury yields and a modest increase in longer-term yields, while major stock indexes declined. His suggestion that the Fed might have more "work to do" to fight inflation put a September rate increase in play, with traders now seeing a 58% chance of a hike, up from 35% on Thursday, according to CME Group data.

The remarks eased concerns that Warsh might be reluctant to raise rates due to pressure from President Trump—a worry that had previously contributed to rising longer-term yields, which play a major role in determining borrowing costs. However, the strong message also made some investors worry that Warsh had put the Fed in a difficult position, potentially forcing a rate hike next month even if the economy doesn't demand it.

George Catrambone, head of fixed income Americas at DWS, said, "You've essentially signaled to the market that the Fed more or less will deliver rate hikes. I'm just not sure that as the data comes in, that's going to be the case." He added that raising rates could hurt the economy amid consumer weakness, but not raising could risk another selloff in longer-term bonds, resurfacing questions about Warsh's credibility.

Investors were hardly panicked by Warsh's remarks, delivered at the Kansas City Fed's annual symposium in Jackson Hole, Wyo. The Dow Jones Industrial Average fell less than 0.1%, the S&P 500 declined 0.2%, and the Nasdaq composite dropped 0.5%. This followed Warsh's two previous high-profile appearances as chairman, where he similarly surprised markets—first with inflation concerns in June, then spooking markets in July with statements questioning his willingness to back up words with policy changes.

While stocks have continued climbing in recent months, the bond market has seen turmoil. The 30-year Treasury yield climbed above 5.3%—its highest since 2007—prompting the Treasury Department to announce it would at least double purchases of longer-term Treasurys as part of its pre-existing buyback program. Treasury Secretary Scott Bessent signaled that the goal was to lower longer-term yields, which he said didn't reflect economic fundamentals. After some volatility, longer-term yields have fallen; the 30-year yield settled Friday at 5.207%, down from 5.266% last Wednesday, while the 10-year note yield rose to 4.721% from 4.671% Thursday, reflecting expectations for Fed rate hikes.