Fed Governor Christopher Waller said elevated long-term Treasury yields are restraining demand and helping with the Fed's tightening. He also flagged AI investment as a possible source of lasting inflation pressure. Together, the two forces leave the timing of further rate hikes open.
Federal Reserve Governor Christopher Waller acknowledged on Tuesday that elevated long-term Treasury yields are helping restrain economic demand. He spoke at Bloomberg's New Economy Forum in New Delhi.
Higher yields take on part of the tightening
Waller pointed to the effect of higher borrowing costs on interest-rate-sensitive sectors such as housing and autos. Higher market yields are not the Fed's direct objective, but Waller said they are "doing a little bit of the work" of slowing economic activity.
Elevated yields are therefore helping contain demand, which could give policymakers flexibility over the timing of further rate increases.
AI investment could keep inflation elevated
Waller also identified AI investment as a potential source of persistent inflation pressure. According to remarks reported from the forum, the rapid expansion of AI infrastructure is already increasing demand, with inflationary effects potentially lasting two to three years.
AI could eventually improve productivity and lift GDP per capita. However, the investment needed during the buildout phase presents a nearer-term challenge for inflation, and Waller indicated that policymakers would need to assess how to respond.
Timing of rate hikes stays open
The two forces point to a tension in the Fed's policy outlook. Waller indicated last week that additional rate hikes would likely be needed, although policymakers had flexibility over their timing.
His latest comments reinforce that distinction. Financial-market tightening may reduce the urgency of immediate action without eliminating the potential need for further Fed tightening.
Source: ActionForex
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