Wall Street Falls After Warsh Flags Inflation Risks; September Rate-Hike Odds Rise to 57.5%

The three major U.S. stock indexes closed lower on Aug. 28 after Federal Reserve Chair Kevin Warsh voiced concern about inflation, boosting expectations for an interest-rate increase next month. Rate-sensitive technology stocks led the declines.

The Dow Jones Industrial Average fell 9.45 points, or 0.02%, to 53,559.99 on the New York Stock Exchange. The S&P 500 dropped 19.28 points, or 0.25%, to 7,711.76.

The tech-heavy Nasdaq Composite slid 138.93 points, or 0.52%, to 26,402.42. Concerns that monetary tightening could last longer weighed on sentiment toward growth stocks.

Investors focused on the Jackson Hole Economic Policy Symposium in Wyoming. In his keynote speech, Warsh did not clearly signal the direction of next month's Federal Open Market Committee decision, but he heightened concern over inflation.

"Inflation-related indicators are concerning," Warsh said. The Fed needs confidence that underlying inflation is slowing clearly and fast enough toward its target, he added. Markets interpreted the remarks as a sign that the Fed could tighten further if inflation does not cool as expected.

Rate futures also reflected a rising chance of a hike. CME data showed the probability that the Fed will raise its benchmark rate by 25 basis points next month from the current 3.50% to 3.75% range climbed to 57.5%, up 22.1 percentage points from 35.4% a day earlier.

The probability of rates remaining unchanged fell to 42.5%. Expectations for a hike have now overtaken those for a pause as concern over inflation intensified. The next FOMC meeting is scheduled for Sept. 15-16.