Christopher Waller didn't mince words: when borrowing costs climb, housing and autos feel it. Speaking in New Delhi, he said the jump in longer-term Treasury yields is tamping down demand in interest-rate-sensitive sectors. That wasn't the plan, he added, but the move in yields is helping tighten conditions on its own.
Rates in the US and other rich economies have pushed up to levels not seen in decades, which has stiffened financial conditions. That rise has come alongside faster inflation linked to the US-Iran war and worries about fiscal deficits.
Positioning has shifted. Bloomberg data show that, across eight key economies, swaps now reflect roughly 200 basis points fewer cumulative hikes than they did in mid September. Initially, investors assigned solid probabilities to the Fed raising rates at its Oct. 27-28 meeting; however, after two senior officials indicated policymakers could take time to assess new data, those bets receded.
Last month, every member of the Federal Open Market Committee supported lifting the benchmark rate, marking the first hike since 2023. And just last week Waller indicated more increases will probably be needed to cool inflation, while noting officials have leeway on when to act.
When a Fed governor says yields are doing the tightening, policy may pause. Market Briefs covers the Fed free every morning.
Economists expect Wednesday's inflation report to show the headline rate sped up in September as energy costs climbed due to the US-Iran war, while core inflation likely cooled.
Waller also flagged a newer source of price pressure: artificial intelligence buildout. "Obviously, if you're building out several trillion dollars of investment in AI and you have to buy all that stuff, and your demand is perfectly inelastic, you'll pay whatever price," he said. "You're going to bid up the price of all semiconductors of all type, and that's going to spill over to anybody else who uses those products. And that's what we're starting to see in the US." He and other Fed officials are optimistic AI can lift productivity over time, enabling stronger growth without excess inflation, but he cautioned that the productivity payoff may be years away and the AI-driven price bump could linger for two or three years.
Waller, appointed during Donald Trump's first term, was asked about a threat to his job from the president, who has repeatedly attacked the Fed for not cutting rates. "There is a threat to Fed independence by the administration," he said. "So far, it hasn't really succeeded." During Trump's second stint, he moved to oust former Chair Jerome Powell - still serving as a governor - and Governor Lisa Cook in order to replace them with his own choices. That effort has rekindled the perennial argument about the degree of influence a president ought to wield on monetary policy.
That fight is active. This month, the White House formed a committee to probe mortgage-fraud accusations against Cook, who is scheduled to make her case at a Nov. 5 hearing at the White House. The Supreme Court has previously stopped Trump's initial attempt to remove her on those grounds, which Cook characterizes as a sham rationale for her ouster.
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