Rising long-term U.S. Treasury yields are tightening financial conditions and weighing on economic demand. Federal Reserve Governor Waller said this process is objectively doing part of the work of monetary tightening.

On October 13, according to Bloomberg, Waller said on Tuesday at the Bloomberg New Economy Forum New Delhi Summit that rising yields are "sharing part" of the work of restraining demand, even though this is not the result the Fed actively pushed for. He noted that higher long-end rates affect rate-sensitive sectors such as housing and autos.

According to Bloomberg data, bond yields in the United States and other major developed economies have risen to multi-decade highs. Since mid-September, the cumulative implied rate hikes in swaps for eight major economies have fallen by nearly 200 basis points, and market expectations for further rate increases have clearly cooled.

AI May Lift Inflation in the Short Term and Productivity in the Long Term

Waller said research shows that the "safety premium" on U.S. Treasuries has disappeared, while higher real yields reflect market expectations for real economic growth. The investment boom brought by artificial intelligence infrastructure construction is also affecting bond yields.

On inflation, Waller pointed out that demand growth from AI infrastructure construction could push inflation higher in the short term; but the effects of AI raising productivity and expanding supply will take years to fully show up in inflation data. He also said AI's potential impact on productivity could further widen the per capita GDP gap between different economies.

Waller said inflation expectations remain well anchored. Asked about pressure on the Fed's independence, he said the related threats have "so far failed to succeed."