Federal Reserve rate-hike odds spiked Friday after Chairman Kevin Warsh delivered a hawkish Jackson Hole message: inflation remains too high, the labor market is effectively at full employment and financial conditions may not be restraining the economy much at all.

Traders on Polymarket pushed the odds of a 2026 rate hike as high as 69%, up from roughly the mid-50s on Thursday.

The move extended well beyond prediction markets. Futures pricing put the chance of a September hike at 59%, up from 35% Thursday, according to CME Group data.

The policy-sensitive two-year Treasury yield rose as much as 9 basis points to 4.32%, while the dollar gained 0.4%.

'We Have Work to Do'

Warsh said PCE inflation is running at 3.7% over the past year and at a 4.1% annualized pace over the past six months. While the most recent summer inflation reports came in better than expected, he said they "do not tell me that underlying trends have meaningfully improved."

He then set out his standard: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Reuters described the remarks as the closest Warsh has come to acknowledging that rate hikes may be needed.

Why a Hike Is Suddenly Plausible

Warsh described the labor market as consistent with full employment, with unemployment at 4.1% and jobless claims near their lowest levels in decades.

He also said he would be "hard pressed to describe broad financial conditions as restrictive," pointing to tight credit spreads, strong corporate issuance and relatively easy bank lending standards.

Investors had been waiting for Warsh to clarify his policy stance after July's press conference left markets uncertain about what would prompt another increase.

Priya Misra, a portfolio manager at JPMorgan Asset Management, called Friday's remarks a "hawkish speech" and a "clean-up act" after the July meeting.

Matthew Amis, investment director at Aberdeen, went further, telling the Financial Times the speech "sets up a September meeting where if they don't hike, credibility will take another bashing."

Warsh still stopped short of explicitly calling for a hike. In fact, he spent much of the speech arguing the Fed should give markets less forward guidance, joking that his remarks could be called a trail map, "just don't call it forward guidance."

Markets apparently did anyway.