Fed Governor Christopher Waller says rising US bond yields reflect strong growth and AI investment rather than inflation, and expects the AI boom to run another two to three years
FED'S WALLER: SURGING U.S. BOND YIELDS DRIVEN BY GROWTH, NOT INFLATION Fed Governor Christopher Waller says strong economic growth and AI investment are pushing Treasury yields higher, while inflation expectations remain anchored. He warns that weaker safe-haven demand for U.S. debt could be adding 50–70 basis points to yields. Waller expects the AI investment boom to continue for another 2–3 years.
Context
A Fed governor naming AI investment as a driver of higher interest rates shows how the AI buildout is now shaping monetary policy and borrowing costs across the economy.
DeItaone is summarizing remarks Waller made at a Bloomberg event in Mumbai on October 13, which Reuters reported. Waller is a member of the Federal Reserve Board of Governors. He also gave a speech on the economic outlook on October 8.
Deep dive
On October 13, DeItaone posted: FED'S WALLER: SURGING U.S. BOND YIELDS DRIVEN BY GROWTH, NOT INFLATION, adding that Waller says strong growth and AI investment are pushing yields higher.
Reuters reported that Waller told a Bloomberg event in Mumbai: Inflation expectations are well anchored, so all of the build up in yields is not coming from an inflation premium. That's not where it's coming from. So it is a factor of real growth. Reuters noted that 10 year Treasury yields have climbed to 24 year highs in recent days, which analysts have tied to war driven inflation worries, rising government debt and massive AI investment.
Waller cited academic research suggesting US government debt has lost some of its status as a global safe haven over the past two years. That's another reason your rates are going to go up if you lose that convenience yield, he said, adding that it could be like 50 to 70 basis points.
According to Reuters, Waller said AI investment, including data center construction, is supporting demand in the economy and could continue to do so for another two or three years, while meaningful productivity gains from AI are still a few years out. In his October 8 speech, he said 16 of 18 Fed officials expected at least one more rate hike this year.
What to expect next
Watch whether other Fed officials echo Waller's view that AI investment is pushing up real rates, and how that shapes the next rate hike decisions.
Also watch 10 year Treasury yields, demand at upcoming debt auctions given his safe haven warning, and whether data center construction keeps supporting growth for the two to three years he expects. Any sign of AI productivity gains arriving sooner would change his outlook.