Federal Reserve Waller: Soaring US Treasury yields help curb demand, AI investment becomes a driver of inflation

According to Zhitong Finance APP, Federal Reserve Governor Christopher Waller stated that the significant rise in long-term U.S. Treasury yields is helping to curb demand in interest rate-sensitive sectors such as housing and automobiles, thereby playing a certain role in tightening monetary policy.

"Will rising yields have an impact on interest rate-sensitive sectors like housing and automobiles? Of course," Waller said at an economic forum held in New Delhi on Tuesday. He noted that although this was not the Fed's intention, the increase in yields does "play a certain role".

Yields Climb to Multi-Decade Highs

Due to inflation exacerbated by the US-Iran war and concerns over budget deficits, yields in the United States and other developed economies have surged to their highest levels in decades, tightening financial conditions. Traders subsequently lowered their rate hike expectations. Data shows that since mid-September, the expected rate hikes priced into swap contracts of eight major economies have dropped by nearly 200 basis points.

Last week, Waller said further rate increases might be needed to curb inflation, but he added that officials have some flexibility in timing additional hikes.

The Federal Open Market Committee unanimously voted to raise interest rates last month, marking the first hike since 2023. Initially, investors believed there was a high probability the Fed would raise rates again at the October 27-28 meeting. However, after two senior officials stated that policymakers had time to assess the economic situation before taking further action, investors scaled back their bets.

Economists expect inflation data released on Wednesday to show that overall inflation in September accelerated due to higher energy costs caused by the US-Iran war, but core price increases are expected to slow.

AI Investment Exacerbates Inflation

Waller stated that AI is also driving up prices because the rapid construction of AI infrastructure is stimulating demand.

Waller said, "Obviously, if you’re investing trillions of dollars in the field of artificial intelligence, you need to purchase all related equipment, and your demand is completely inelastic, which means you’re willing to pay regardless of the price. All types of semiconductor prices will rise, and this will eventually affect everyone who uses these products. This is exactly what we are beginning to see in the United States."

Waller is among the many Fed officials hoping that AI will eventually boost productivity. If AI can increase productivity, the economy could achieve stronger growth without triggering excessive inflation. But he said that such returns may still take several years to materialize, while AI-driven price pressures may persist for two to three years.

Federal Reserve Independence Faces Threats

When asked about former U.S. President Donald Trump's threats to his work, Waller said he believes Congress and the U.S. courts can safeguard the Fed's autonomy. Trump has repeatedly criticized the Fed for not cutting rates.

"This administration poses a threat to the Federal Reserve's independence," Waller said. "So far, this threat has not truly succeeded." Waller was appointed by Trump during his first term.

During his second presidential term, Trump attempted to remove then-chair Jerome Powell (who still serves as a Fed governor) and Governor Lisa Cook, in order to install his own nominees. This pressure campaign reignited the debate over how much influence the president should have over monetary policy. Most economists believe that central banks achieve better results in controlling inflation if they can independently manage monetary policy.

Trump’s pressure actions have not ceased. This month, the White House announced the establishment of a committee to investigate allegations of mortgage fraud against Cook. Cook will defend herself at a White House hearing on November 5.

Previously, the U.S. Supreme Court had blocked Trump from removing Cook based on these allegations. Cook claims that these accusations were fabricated by Trump to legally justify removing her from office.