US short-term Treasury yields moved sharply higher after Federal Reserve Chair Waller delivered a strong anti-inflation message at the Jackson Hole global central bank symposium. Waller emphasized that the Fed must curb price growth and reiterated his commitment to bringing inflation back to the 2% target at a "sufficiently fast pace," which somewhat eased bond market doubts about his resolve to fight inflation.

Following Waller's remarks, traders quickly increased bets that the Fed could resume rate hikes as soon as next month. Market data showed the two-year US Treasury yield rose as much as 9 basis points to 4.32%. In stark contrast, the 30-year Treasury yield fell 2 basis points to 5.17%, causing a notable flattening of the yield curve. This movement reflects the market repricing its expectations for Fed policy. If the Fed further suppresses demand and inflation by raising short-term rates, longer-term inflation pressures could ease down the road, thereby limiting the upside for long-term borrowing costs.

Waller warned on Friday that US inflation has not shown "meaningful slowing" and pledged to push inflation back to the Fed's 2% target at a "sufficiently fast pace." He also explicitly stressed that the 2% inflation goal is "firm and immovable," further dispelling market speculation that the Fed might adjust its inflation target. Shiyan Cao, portfolio manager at Winshore Capital Partners, said the market interpreted Waller's speech as clearly hawkish. "People see him as a hawk," Cao said, adding that Waller "signaled a sense of urgency" in bringing down inflation.

Interest rate markets quickly raised their expectations for Fed rate hikes after the speech. Swap markets showed traders now price in a greater than 50% probability of a 25-basis-point rate increase at the Fed's September 16 policy meeting. Meanwhile, at least one rate hike before year-end is now seen as nearly certain. This marks a notable shift from pre-speech pricing. Waller's stance suggests the Fed may still prioritize controlling inflation over other concerns, even if some recent economic data points to cooling.

The most obvious change in the Treasury market after Waller's speech was not a synchronized rise across all maturities, but rather a classic flattening of the yield curve. The two-year Treasury yield, which is highly sensitive to Fed policy rate expectations, surged as rate hike bets intensified. At the same time, the 30-year yield edged lower. This combination of rising short-end yields and falling long-end yields means investors believe the Fed may need to tighten policy more aggressively in the near term, but higher short-term rates should ultimately help lower inflation and economic demand, thereby reducing the risk of elevated long-term inflation and persistently higher long-term rates. In other words, the bond market is betting the Fed may be more hawkish in the short run, but if anti-inflation policies prove effective, long-term price pressures could actually be contained.

The market reaction also shows that Waller has partly alleviated concerns bond investors had over the past few months regarding his policy stance. When he first appeared at a press conference as Fed Chair in June, Waller displayed a clearly hawkish position, emphasizing the need to bring down inflation that had remained elevated since the global economy reopened from the pandemic in 2021. However, the Fed decided to hold rates steady again in July, and Waller did not explicitly state at the post-meeting press conference whether a hike was possible this year, leading to market doubts about the Fed's commitment to fighting inflation. At that time, long-term Treasuries were sold off significantly, pushing long-end yields sharply higher as investors demanded higher yields to compensate for the risk of persistently elevated inflation.

In this Jackson Hole speech, Waller not only clearly reaffirmed the 2% inflation target but also stated that current financial conditions are not truly restrictive, while emphasizing that if underlying inflation does not fall fast enough, the Fed still "has work to do." These remarks clearly strengthened market expectations for further rate hikes. George Catrambone, head of fixed income at DWS Americas, said Waller's speech effectively provided the policy guidance the market had been seeking. "Whatever you want to call it, this is exactly the forward guidance the market wanted at the July FOMC meeting," Catrambone said. He believes Waller's remarks even exceeded market expectations, including downplaying wage inflation risks and clearly stating his view that current monetary policy is not actually very restrictive. "This is quite a significant 180-degree turn."

Overall, Waller's Jackson Hole speech has clearly shifted market pricing for the Fed's near-term policy path. The rapid rise in two-year Treasury yields, the flattening yield curve, and the probability of a September rate hike rising above 50% all indicate that investors are repositioning for a more hawkish Fed. With inflation still above the 2% target, the core message from Waller's speech is clear: the Fed does not yet consider its anti-inflation mission complete, and if price pressures do not cool persistently and quickly, further rate hikes remain a realistic policy option.