Federal Reserve Chair Kevin Warsh signalled that the U.S. central bank could need to raise interest rates if inflation fails to show sufficient progress toward its 2% target, delivering a hawkish message that prompted markets to increase bets on a rate hike as soon as next month.Warsh's remarks marked his clearest indication so far that higher interest rates could be necessary to bring persistent price pressures under control. He stressed the Fed's commitment to its 2% inflation objective and indicated that policymakers would need to act if underlying inflation does not improve enough.Financial markets reacted swiftly to the comments. The yield on the policy-sensitive two-year U.S. Treasury note jumped 11 basis points to 4.34%, its highest level in a month. The 10-year Treasury yield rose 5 basis points to 4.72%, while the 30-year yield gained 1.6 basis points to 5.206%.According to CME data cited by Reuters, financial markets were pricing in a roughly 60% probability of a Federal Reserve rate increase at the September meeting, up sharply from about 35% before Warsh's speech.Reuters reported that market strategists broadly viewed Warsh's remarks as leaning hawkish, particularly given his assessment that inflation remains above target while economic growth and employment have held up relatively well.The comments also reinforced expectations that the Fed could keep monetary policy restrictive for longer. Investors are now focusing on upcoming inflation and labour-market data for further clues about whether policymakers will raise rates at their next meeting or wait until later in the year.Warsh's approach also marks a shift toward less explicit forward guidance, with the Fed chair signalling that investors should place greater emphasis on incoming economic data rather than relying on detailed indications of future policy moves.The market reaction reflected a reassessment of the balance between inflation and growth risks. Short-term Treasury yields moved higher as investors increased expectations for tighter policy, while longer-dated yields showed a more muted response, pointing to a potential flattening of the yield curve.Several market participants expect the Fed to remain focused on inflation given that labour-market conditions remain resilient and financial conditions are not sufficiently restrictive to guarantee a rapid return of inflation to target.The latest shift in expectations puts greater importance on forthcoming inflation readings and employment data, which could determine whether the Fed follows through with a rate increase in September or delays action until later in the year.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times.)