Fed Governor Waller Says Higher Bond Yields Reflect Growth and Fiscal Risks, Not Inflation Expectations

Federal Reserve Governor Christopher Waller delivered a wide-ranging assessment on October 13, attributing the rise in U.S. bond yields primarily to stronger growth expectations and deteriorating fiscal conditions rather than unanchored inflation expectations, which he said remain well anchored. He noted that higher yields are effectively doing some of the Fed's tightening work for it, a framing that reinforces the case for holding rates steady. Markets were already pricing in roughly an 80.6% probability of no rate change at the Fed's October meeting, with the dollar pulling back slightly to around 102.35 after touching an 18-month high.

Waller flagged artificial intelligence as a growing inflation factor, saying the build-out phase of AI infrastructure is driving elevated demand and that this inflationary pressure could persist for two to three years. He cited reports from hyperscalers that they are still planning to spend trillions of dollars over the next three years, suggesting the AI investment cycle has significant runway.

On fiscal risks, Waller pointed to France as a country nearing fiscal dominance, while cautioning that the United States may also become a concern. He referenced emerging academic research suggesting that the U.S. safety premium in sovereign debt markets has eroded. He was direct about political pressure on the central bank, saying the Trump administration represents a threat to Fed independence but that independence is holding up so far, and warning that bond markets would react to any signs of political influence over monetary policy.

The remarks came alongside an IMF warning at its annual meeting that the world's top economies are on course for their largest budget deficits since the Covid pandemic, with the fund calling for urgent action to rebuild public finances. Separately, Bank of America kept its cautious stance on gold, maintaining a fourth-quarter 2026 average forecast of $4,000 per ounce and flagging $3,750 as a potential low, arguing that energy-driven inflation keeps the Fed too hawkish for gold to find a durable floor.