NEW YORK (AP) — U.S. stocks are drifting Friday while expectations rise for the Federal Reserve to hike interest rates soon to get the nation’s high inflation under control.
The S&P 500 was virtually unchanged after flipping between modest gains and losses through the morning. The Dow Jones Industrial Average was up 74 points, or 0.1%, as of noon Eastern time, and the Nasdaq composite was 0.5% lower.
The bond market had more of a reaction following Kevin Warsh’s first time speaking as chairman of the Fed at an annual economic symposium 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 4.32% from 4.22% just before the speech.
Traders are betting on a nearly 60% probability the Fed will hike its federal funds rate as soon as next month, up from the 35% probability they saw a day earlier, according to data from CME Group.
Longer-term yields, which move more on expectations of what the economy and inflation will do in upcoming years, were mixed. The 10-year Treasury yield rose to 4.70% from 4.67% late Thursday.
The 30-year Treasury yield was at 5.19%, where it was late Thursday. Lower long-term yields could indicate bond investors see less of a threat of high inflation in far-out years, but both the 10- and 30-year yields were zigzagging immediately after Warsh began his speech.
Yields had gotten so high during the summer for those longer-term bonds 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.
“The problem with the Warsh approach to monetary policy is that it could collide with the Treasury’s interventions in the bond market,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management.
Warsh said Friday he prefers to use short-term interest rates to do the Fed’s job when he called them its “predominant tool,” rather than buying bonds and adding them to the Fed’s holdings like it’s often done since the 2008 financial crisis.
On Wall Street, Gap jumped 13.5% 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 10.2% 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.
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.
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AP Business Writers Michelle Chapman and Elaine Kurtenbach contributed to this report.
