Fed's Waller: Surging US Treasury yields help curb demand, AI investment becomes a driver of inflation

Federal Reserve Governor Christopher Waller said the sharp rise in long-term U.S. Treasury yields is helping to curb demand in interest-rate-sensitive sectors such as housing and autos, thereby acting as a degree of monetary policy tightening. "Does the rise in yields have an impact on interest-rate-sensitive sectors like housing and autos? Of course it does," Waller said Tuesday at an economic forum in New Delhi. He noted that while this was not the Fed's intention, the rise in yields has indeed "played a role." Yields climb to multi-decade highs Driven by inflation exacerbated by the U.S.-Iran war and concerns over budget gaps, yields in the U.S. and other developed economies have climbed to multi-decade highs, tightening financial conditions. Traders promptly scaled back rate hike expectations. Data showed that since mid-September, the rate hike magnitude priced into swap contracts across eight major economies has fallen by nearly 200 basis points. Last week, Waller said further rate hikes may be needed to curb inflation, but added that officials have some flexibility on timing when considering another increase. The Federal Open Market Committee voted unanimously to raise rates last month, the first time since 2023. Investors initially saw a high probability that the Fed would hike again at its Oct. 27-28 meeting. But after two senior officials said policymakers have time to assess economic conditions before acting again, investors cut those bets. Economists expect Wednesday's inflation data to show headline inflation accelerated in September due to the U.S.-Iran war pushing up energy costs, while core price gains are expected to slow. AI investment fuels inflation Waller said AI is also pushing up prices, as the rapid buildout of AI infrastructure stimulates demand. "Obviously, if you're spending trillions of dollars on AI, you need to buy all the equipment involved, and your demand is completely inelastic, so you're willing to pay whatever the price is," Waller said. "Prices for all types of semiconductors will rise, and that ultimately feeds through to everyone who uses these products. This is exactly what we're starting to see in the United States." Waller is among many Fed officials who hope AI will eventually boost productivity. If AI can raise productivity, the economy could achieve stronger growth without triggering excessive inflation. But he said those returns may still take years to materialize, while AI-driven price pressures could persist for two to three years. Fed independence under threat When asked about the threat posed to his job by U.S. President Donald Trump, Waller said he believes Congress and U.S. courts can uphold the Fed's autonomy. Trump has repeatedly attacked the Fed for not cutting rates. "This administration poses a threat to the Fed's independence," Waller said. "So far, that threat has not really succeeded." Waller was appointed by Trump during his first term. During his second presidential term, Trump has sought to remove then-Chair Jerome Powell (who remains a Fed governor) and Governor Lisa Cook in order to install his own nominees. The pressure campaign has reignited debate over how much influence a president should have over monetary policy. Most economists believe central banks control inflation better when they manage monetary policy independently. Trump's pressure has not ended. This month, the White House announced the formation of a committee to investigate mortgage fraud allegations against Cook. Cook will defend herself at a White House hearing on Nov. 5. Previously, the U.S. Supreme Court blocked Trump from removing Cook based on those allegations. Cook has said the allegations were fabricated by Trump to legally justify removing her.