Federal Reserve Governor Christopher Waller said on Thursday that the extra yield investors once accepted for holding the safest, most liquid U.S. government debt has largely evaporated - a shift that has caused him to lift his view of the neutral federal funds rate.
Waller made the remarks at a Newsmaker event on Thursday, saying that yields have risen not only because of worries about the U.S. fiscal outlook but also as a result of competition for capital tied to investment in artificial intelligence infrastructure. He pointed to academic work showing the erosion of the Treasury safety premium, citing research by Stanford Graduate School of Business professor Hanno Lustig that indicates the premium has been eroded over several years.
"There’s no more premium for safe, liquid U.S. government debt," Waller said, adding that this development has led him to increase his estimate of the neutral rate - the policy rate consistent with stable inflation and full employment. In his words, a higher neutral rate "means higher policy rates for any given rate of inflation - maybe you’re not as restrictive as you thought you were."
Waller said he remains inclined to be patient on policy and to let incoming data confirm that price pressures are cooling. In prepared remarks, he noted that if forthcoming data support easing inflation pressures, he would be inclined to advocate holding interest rates steady at the Fed's next policy meeting. He reiterated that argument in comments urging policymakers to "give disinflation a chance."
Market participants reacted to Waller's comments by sending Treasury yields lower on Thursday. The benchmark 10-year Treasury yield fell to 4.74% after reaching 4.818% on Wednesday, which was the highest level since November 1, 2023.
On the broader fiscal picture, Waller said that for the United States to "grow its way out" of an estimated $40 trillion debt load would require structural deficits to be driven much closer to zero from their current level. He observed that this fiscal year’s structural deficit stands at roughly 6% of GDP and said reducing that structural shortfall would be essential to sustainably address the debt burden.
Asked about proposals to rely on growth to reduce debt - a strategy advocated by others in government - Waller acknowledged that growth could play a role only if structural deficits were markedly smaller. He commented that relying on inflation to shrink the real value of debt, as occurred after World War Two, is "not a good outcome" for improving Americans' welfare in the present environment. He also noted that even a scenario of 3% real GDP growth combined with 2% inflation would not lower the budget deficit in real terms as a share of GDP.
Waller referenced policy proposals from the Treasury secretary, including a target to reduce the annual U.S. budget deficit to 3% of GDP alongside assumptions of 3% real GDP growth and an increase in energy production of 3 million barrels per day. He noted that the fiscal 2025 deficit fell to 5.9% of GDP from 6.3% in fiscal 2024, but also pointed out that the deficit in fiscal 2026 is expected to be larger due to tariff refunds following a Supreme Court decision that struck down emergency tariffs - a factor the Treasury secretary has acknowledged.
Waller was also skeptical about short-term interventions aimed at directly influencing Treasury yields. He dismissed the likely effectiveness of doubling the size of bond buybacks for longer-dated Treasuries, a program whose first operation of at least $4 billion is scheduled for September 10. "I’ve never believed as an economist, not a policymaker, that these kind of short-run interventions do much," he said, but added that it is the Treasury secretary's prerogative to undertake them if he chooses.
The combination of fading safety demand, fiscal strain and competing private-sector investment needs - in Waller's account notably driven by AI infrastructure - has reshaped his thinking about where the neutral rate lies. That recalibration has practical consequences: if the neutral rate is higher, then a given level of the federal funds rate is less restrictive than officials may have presumed, which in turn affects how the Fed judges the odds of returning inflation to target without further rate increases.
Waller's comments come at a moment when markets and policymakers are weighing incoming inflation data and assessing whether disinflationary trends will persist. He said he is prepared to argue for a pause in rate increases if data confirm cooling price pressures, underscoring a data-dependent approach to policy.
Key points
- Waller says the safety premium for U.S. Treasuries has mostly disappeared, prompting him to raise his neutral rate estimate - impact: bond markets, interest rates.
- Rising yields reflect concerns about the fiscal outlook and competing capital needs from AI infrastructure investment - impact: fixed-income and technology-related capital allocation.
- Waller argues the U.S. cannot sustainably reduce a roughly $40 trillion debt load unless structural deficits fall much closer to zero - impact: fiscal policy, public finance.
Risks and uncertainties
- Uncertainty over the trajectory of inflation and whether incoming data will confirm cooling price pressures - impact: monetary policy and interest-rate sensitive sectors.
- Fiscal developments, including tariff-related refunds and deficit dynamics, could keep upward pressure on yields - impact: Treasury market and broader borrowing costs.
- The efficacy of short-run interventions, such as larger Treasury buybacks, is unclear and may not alter underlying yield drivers - impact: market liquidity and long-dated bond yields.