The Kevin Warsh Jackson Hole speech rattled bond markets and lifted equities on Friday, after the Federal Reserve chairman warned that inflation is not meaningfully slowing and that the central bank may yet have more work to do on interest rates. London stocks closed in positive territory, with the FTSE 100 finishing up 31.72 points, or 0.3%, at 10,824.26.
The Federal Reserve (Fed) is the United States’ central bank, responsible for setting interest rates. When its chairman signals that rates could rise, borrowing costs across the globe tend to shift, affecting everything from mortgage rates to stock prices.
What Kevin Warsh’s Jackson Hole Speech Said
Kevin Warsh used the Jackson Hole economic symposium (an annual gathering of central bankers and economists) to deliver his first public address since taking the chair of the Fed in May. He reiterated that policymakers will return inflation to their 2% target, which he described as a firm and fixed goal. On the jobs side of the Fed’s responsibilities, Mr Warsh concluded that labour markets are consistent with full employment. But on prices, he said, “the numbers are more concerning,” and warned that unless inflation is clearly slowing, the central bank has “work to do.”
Samuel Tombs, chief US economist at Pantheon Macroeconomics, described the speech as striking “a pragmatic, slightly hawkish tone.” He said it spurred investors to price in 53 basis points (bp) of policy tightening over the next 12 months, up from 45bp beforehand. A basis point is one hundredth of a percentage point, used to describe small moves in interest rates.
Mr Tombs added that the base case that the Federal Open Market Committee (FOMC) would keep policy unchanged for the rest of the year was “under a little more pressure” after the speech, and that a single 25bp rate rise by December could not be ruled out. He retained the view, however, that policy would be eased next year as the economy slows following a period of fiscal stimulus in the first half of 2026 and inflation pressures abate.
Markets React Across the Board
Short-term US government bond yields moved higher after the speech. The two-year Treasury yield rose to 4.30% from around 4.23% beforehand. Longer-dated yields were more measured: the 10-year Treasury yield was quoted at 4.68%, widening from 4.66% on Thursday but pulling back from 4.70% ahead of the speech, while the 30-year Treasury yield held at 5.18%, also narrowing from 5.21% just before Mr Warsh spoke.
In New York, equities took the speech in their stride. The Dow Jones Industrial Average was up 0.4%, with the S&P 500 index and the Nasdaq Composite both 0.5% higher. Kathleen Brooks, research director at XTB, said the dollar index “has also been given a boost by Warsh, and is the top-performing major currency on Friday.” She added that the biggest losers on the foreign exchange front included EUR/USD and GBP/USD. The pound was quoted at 1.3560 dollars at the London equities close, down from 1.3588 dollars on Thursday.
Gold fell sharply, quoted at $4,540.70 an ounce, down from $4,597.90 on Thursday. Ms Brooks explained: “The focus on inflation has also knocked interest for gold. Gold is an inflation hedge, so it tends to underperform when the Fed is in inflation-fighting mode.”
Across European markets, the CAC 40 in Paris closed up 1.0% and the DAX 40 in Frankfurt ended up 0.8%. Further warning signs on prices emerged from the continent: Spain’s annual headline inflation rate accelerated to 4.5% in August, its fastest pace since 2023, while France’s rate rose to 2.7%, its highest since May.
UK Defence Stocks Slide on Spending Uncertainty
The day’s biggest losers on the FTSE 100 were defence-related. Babcock International and BAE Systems fell 2.4% and 2.3% respectively, landing at the bottom of the blue-chip index amid uncertainty over the UK Government’s defence spending commitments.
The Financial Times reported on Friday, citing government insiders, that Chancellor John Healey will shelve his target for defence spending to reach 3% of gross domestic product (GDP) by 2030 when he delivers his first budget in October. According to Morningstar (Alliance News), the October budget is instead expected to focus on filling a defence equipment funding gap of almost £5.0 billion left by the previous government, equivalent to around £1.2 billion annually. Larger decisions over increasing defence spending will be delayed until a Treasury spending review next year, when the government plans to set out a path towards spending 3.5% of GDP on defence by 2035 and will also establish a target date for reaching 3%.
That context matters for Mr Healey personally. He resigned as defence secretary in June over what he viewed as insufficient ambition for military spending under former prime minister Keir Starmer, before taking on his current role. Addressing Sky News on Friday, he said that “fiscal discipline” was the first priority for any chancellor, while acknowledging the financial pressures created by global conflict and rising security threats.
Elsewhere on the FTSE 250, Hays topped the mid-cap index, up 5.1%, after Panmure Liberum upgraded the recruiter to “buy.” McBride rose 23% after signing what it called a “transformational” deal with Netherlands-based Vestacy, the home care company behind brands including Air Wick, Calgon, Cillit Bang and Mortein. Analysts believe the manufacturing partnership will materially increase the cleaning products maker’s scale, earnings and predictability. Among smaller companies, Sunda Energy jumped 26%.
UK financial markets will be closed on Monday for the Summer Bank Holiday. When trading resumes on Tuesday, the domestic calendar includes shop price inflation figures and mortgage approvals data.
