A cool August CPI reading on Sept. 11 would likely keep the Fed's benchmark rate unchanged at the Sept. 15-16 meeting, after Waller's conditional guidance cut the odds of a hike and drove the 10-year Treasury yield to 4.74%.
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Waller's Hold Case Trims Rate-Hike Bets, Sending 10-Year Yield to 4.74%
Fed Governor Christopher Waller made the case Thursday for holding rates steady at the Sept. 15-16 meeting, easing market bets on a September hike unless August inflation comes in hot.
"But if inflation comes in hot, I would consider a rate hike," Waller said at a Reuters NEXT event in Washington. "Give disinflation a chance."
Waller's comments helped push the benchmark 10-year Treasury yield down to 4.74% after it touched 4.818% on Wednesday, its highest since Nov. 1, 2023, while stocks rose. The Fed's preferred inflation gauge ticked down 0.1% from May to June and rose just 0.2% from June to July, a pace that would move price growth much closer to the central bank's 2% target.
The August consumer price index, due Sept. 11, now looms as the decisive input for a meeting that Fed Chair Kevin Warsh has left deliberately open. "September's meeting is going to be knife edge and it's going to come down to how the CPI data prints," said Joseph Purtell, portfolio manager at Neuberger. Warsh, who said last week at Jackson Hole that inflation had not shown sufficient improvement and that the central bank might have "more work to do," could command a majority for either a hold or a hike, Purtell added.
Waller, an outspoken member of the Fed's seven-person governing board, framed his guidance around "considerable uncertainty" over the inflation outlook, citing upside risks from rising energy prices, stronger demand for tech goods tied to artificial-intelligence investment, and the potential for more tariffs. He described current borrowing costs as only "slightly restricting" consumer and business demand, adding that "it may not take much acceleration in inflation to nudge me into supporting" a hike. His stance marks a turn from the run-up to the meeting, when investors sharply increased bets on a rate increase after Warsh's Jackson Hole speech, and it suggests the decision rests on a single data point rather than a predetermined path.
Fiscal Pressures Keep Yields Elevated
Waller also argued that the traditional safety premium on U.S. government debt has largely disappeared, pushing his estimate of the neutral rate higher and, by extension, the level of policy rates needed to restrain inflation. He cited Stanford research showing the premium has eroded over several years and pointed to competition for capital from AI infrastructure investment and concerns over the U.S. fiscal position as forces keeping yields up. He said the United States cannot grow its way out of a roughly $40 trillion debt load unless structural deficits fall closer to zero from this fiscal year's level of about 6% of gross domestic product. The fiscal 2025 deficit narrowed to 5.9% of GDP from 6.3% in fiscal 2024, though Treasury Secretary Scott Bessent has acknowledged the fiscal 2026 shortfall will be larger because of tariff refunds after the Supreme Court struck down the administration's emergency tariffs. Waller dismissed Bessent's plan to double buybacks of longer-dated Treasuries — the first operation of at least $4 billion is due Sept. 10 — saying such short-run interventions "don't do much."
If the decision comes down to the CPI print, a cool reading would likely lock in a hold and extend the relief that pushed yields lower Thursday, while a hot one would revive hike bets and pressure equities. Either way, Waller's comments have turned the September meeting into a genuine coin flip rather than the near-certain hike markets priced after Jackson Hole.
This article is for informational purposes only and does not constitute investment advice.
[1] New doubts emerge about whether Fed will raise interest rates this month[2] Wall Street rallies as Fed's Waller eases rate hike fears[3] Will Federal Reserve hike rates later this month? Waller muddies the outlook[4] Fed's Waller says safety premium for Treasuries is gone, pushing neutral rate higher[5] Fed's Waller gives conditional guidance due to 'considerable uncertainty' over inflation outlook
