Federal Reserve Chairman Kevin Warsh’s tough talk on inflation Wednesday reverberated through financial markets, with traders expecting that the central bank could start jacking up interest rates in just a few months.

Tapped to serve by President Donald Trump, who has repeatedly demanded lower rates, Warsh during a news conference instead focused on the battle against inflation, which has run above the Fed’s official 2% target for five years.

“Persistently high prices are a burden for the American people, but the recent past need not be prologue,” he said. “I am pleased to report that members of the [Federal Open Market Committee] are unambiguous and unanimous. This committee will deliver price stability.”

Markets immediately took notice as the new central bank leader sought to establish his inflation-fighting credentials.

The 2-year Treasury yield, seen as a market reflection of Fed moves, soared as Warsh spoke.

At the same time, futures market traders began placing bets on when the next rate hike would come. The probability for an increase at the July 28-29 meeting quickly climbed to about 1 in 3. Odds for a September hike spiked to 67% around midday Thursday, according to the CME Group’s FedWatch gauge.

Dispelling the Warsh narrative

Moreover, traders priced in largely tighter Fed policy well into the future, too.

The odds of a second hike by September 2027 rose above 45%. Even further out, the market-implied fed funds rate for May 2031 stood at 4.78%, indicating as many as five hikes in as many years from the current target range of 3.50%-3.75%.

A popular narrative that Warsh was sent to the Fed to ease monetary policy at all costs was quickly dispelled within the space of a 40-minute parley with reporters. At times serious and other times light-hearted, the session was notable for the inflation focus, with Warsh referring to “price stability” a dozen times.

Market veteran Ed Yardeni said he was “blown away” by Warsh’s remarks.

“We thought he was a dove who favored lowering the federal funds rate (FFR) because he believes that AI is boosting productivity and economic growth while keeping a lid on inflation,” the head of Yardeni Research said in an overnight note. “Instead, he hammered home a strict, orthodox message on inflation with a strong commitment to price stability.”

The pivot to inflation fighter shook investors, with stock market averages diving along with the spike in Treasury yields.

But apprehension about a possibly hawkish Warsh Fed dissipated Thursday as Wall Street digested the FOMC meeting outcome and focused more on positive developments in the Iran war and the prospect for lower energy costs ahead. Stocks rallied and yields were flat to lower.

Some positives on inflation

There seems reason for optimism that the chairman’s position in retrospect could be seen as a good deal of saber-rattling amid what might already be positive prospects for inflation. Even with popular inflation gauges at…

It ended up being a “hawkish cut,” as expected. Still, investors managed to find a few gifts tucked between the lumps of coal.

Even though the U.S. Federal Reserve lowered interest rates on Wednesday stateside, two regional bank presidents — Jeffrey Schmid of Kansas City and Austan Goolsbee of Chicago — wanted rates to stand pat.

Their cautioned was echoed in the Fed’s “dot plot” of rate projection, which showed officials penciling in just one cut in 2026 and another for 2027.

Even the Fed’s rate statement was repurposed from the December 2024 meeting, which ushered in a nine-month period without cuts until September this year.

Why, then, did U.S. markets rise after the meeting?

The biggest surprise was the Fed’s announcement that it would begin purchasing $40 billion in Treasury bills, starting Friday. That move increases the money supply in the economy. In other words, it’s a stealthy way to ease conditions, which helps support financial markets.

Next, Chair Jerome Powell dismissed speculation about future hikes.

“I don’t think that a rate hike … is anybody’s base case at this point,” Powell said. “I’m not hearing that.”

Fed officials also see the U.S economy as remaining resilient. Collectively, they increased their forecast for economic expansion in 2026 to 2.3% from an earlier estimate of 1.8% in September.

“We have an extraordinary economy,” said Powell.

And the markets may be setting up for an extraordinary finish to the year.

“The last interest rate decision of 2025 has essentially paved the way for a Santa Claus rally to end the year, and the S&P 500 is poised to exceed the 7,000 milestone in the next few weeks,” said José Torres, senior economist at Interactive Brokers.

For investors, that would count as a very decent Christmas surprise.

— CNBC’s Jeff Cox contributed to this report.

Trump slams European leaders as ‘weak’ — just as they’re trying to impress him

U.S. President Donald Trump has once again provoked outrage among his European allies, describing them as “weak” in an interview with Politico published Tuesday. Criticizing the region’s response to the war in Ukraine, Trump said: “I think they don’t know what to do.”

That comment will be jarring for Europe after its efforts to support Ukraine — efforts which Trump has frequently downplayed. Instead, Europe has had to watch on as U.S. officials have held talks with their Russian and Ukrainian counterparts on a draft peace plan for Ukraine, without a seat at the table. 

— Holly Ellyatt