The Zhitong Finance App learned that Federal Reserve Governor Christopher Waller said that the sharp rise in long-term US Treasury yields is helping to curb demand in interest rate sensitive industries such as housing and automobiles, thus playing a role in tightening monetary policy to a certain extent.
“Will rising yields have an impact on interest rate sensitive industries such as housing and automobiles? Of course,” Waller said at an economic forum in New Delhi on Tuesday. He pointed out that although this was not the intention of the Federal Reserve, the increase in yield did “play a certain role.”
Yield rises to a decades-high
Due to increased inflation caused by the US-Iran war and concerns about budget gaps, yields in the US and other developed economies have climbed to decades-long highs, and the financial environment has tightened. Traders immediately lowered their expectations for interest rate hikes. The data shows that since mid-September, interest rate hikes priced in the eight major economies' swap contracts have declined by nearly 200 basis points.
Last week, Waller said that further rate hikes may be needed to curb inflation, but he added that officials have some flexibility in the schedule when considering raising interest rates again.
The Federal Open Market Committee voted unanimously last month to raise interest rates for the first time since 2023. Investors initially thought there was a high probability that the Federal Reserve would raise interest rates again at the October 27-28 meeting. But investors cut their bets after two senior officials said policymakers had time to assess the state of the economy before taking action again.
Economists expect that the inflation data released on Wednesday will show that the overall inflation rate accelerated in September due to the US-Iran war driving up energy costs, but the increase in core prices is expected to slow.
AI investments fuel inflation
Waller said that AI is also driving up prices because the rapid construction of AI infrastructure stimulates demand.
Waller said, “Obviously, if you invest trillions of dollars in the field of artificial intelligence, need to buy all related devices, and your needs are completely inelastic, then you are willing to pay no matter the price. Prices of all types of semiconductors will rise, and this will eventually affect everyone using these products. This is exactly what we're starting to see in America.”
Waller is one of many US Federal Reserve officials hoping AI will eventually increase productivity. If AI can increase productivity, the economy is expected to grow stronger without causing excessive inflation. But he said that this return may take years to materialize, while AI-driven price pressure may continue for two to three years.
The independence of the Federal Reserve is under threat
When asked about the threat that US President Donald Trump poses to his work, Waller said he believes Congress and the US courts can preserve the autonomy of the Federal Reserve. Trump has repeatedly criticized the Federal Reserve for refusing to cut interest rates.
“The current administration poses a threat to the independence of the Federal Reserve,” Waller said. “So far, this threat has not really succeeded.” Waller was appointed by Trump during his first term.
During his second term as president, Trump tried to remove then-Chairman Jerome Powell (who is still a member of the Federal Reserve) and Governor Lisa Cook in order to place his own nominees. This pressurization has reignited a debate about how much influence the president should have on monetary policy. Most economists believe that central banks will achieve better results in controlling inflation if they let them manage monetary policy on their own.
Trump's pressure is not over. This month, the White House announced the formation of a committee to investigate mortgage fraud allegations against Cook. Cook will defend himself during a November 5 White House hearing.
Previously, the US Supreme Court had blocked Trump from dismissing Cook on these charges. Cook said these accusations were fabricated by Trump in order to legally rationalize her removal.