Waller Hints at Possible Rate Pause in September...U.S. 10-Year Yield Falls (Comprehensive)

"Some Signs of Disinflation Appear"

Market Focuses on August Inflation Data

10-Year Treasury Yield Drops to 4.74% Intraday

Christopher Waller, Federal Reserve Board Governor, has signaled the possibility of holding rates steady at the September Federal Open Market Committee (FOMC) meeting. He indicated that, as recent price trends are showing signs of disinflation, it may be prudent to wait one more meeting to observe the situation.

As a result, market expectations for a rate hike in September partially receded, and U.S. Treasury yields declined. The yield on the 10-year U.S. Treasury bond, which had soared to its highest level since November 2023 the previous day, dropped to the 4.74% range intraday.

Christopher Waller, Federal Reserve Board Governor. Photo by Yonhap News

On the 3rd (local time), at an event hosted by Reuters, Waller stated, "If the data released over the next two weeks continue this trend, I would be inclined to support keeping the target range for the federal funds rate at its current level."

He acknowledged that inflation is currently "meaningfully above" the Fed's 2% target, but assessed that "we are finally seeing some signs of disinflation" in the recent data.

Waller said, "We need to give disinflation a chance," and emphasized, "We can wait for about one meeting." He also explained that raising the policy rate by 0.25 percentage points immediately will not instantly bring the Consumer Price Index (CPI) down to 2%.

Rate Hike Expectations Partially Recede...10-Year Treasury Yield Falls to 4.74% Intraday

The yield on 10-year U.S. Treasury bonds fell to around 4.74% intraday on the 3rd (local time) before closing at 4.758%. Investing.com

Immediately after Waller's remarks, market rate forecasts shifted significantly. According to CME FedWatch, the probability of a 0.25 percentage point rate hike at the September FOMC meeting dropped to around 50%. This probability was 63.2% the previous day and had risen to nearly 70% earlier this week.

The bond market also reacted immediately. The yield on the 10-year Treasury bond fell to 4.744% intraday that day. The previous day, the 10-year yield had surged to 4.818%, the highest since November 1, 2023. Waller's comments helped ease concerns about further tightening, which is believed to have somewhat calmed the recent wave of Treasury selloffs.

The 10-year yield at one point dropped by 3.6 basis points (1 bp=0.01 percentage points) to 4.758%, marking the largest decline since August 25. In particular, short-term Treasuries, which are more sensitive to policy rate outlooks, showed relative strength.

Recently, the U.S. Treasury market has experienced a sharp rise in long-term yields due to multiple factors: intensified inflation concerns stemming from higher international oil prices triggered by the Iran situation, the U.S. fiscal deficit, and increased capital demand as artificial intelligence (AI) infrastructure investments expand.

Waller also diagnosed that the recent rise in Treasury yields is influenced not only by concerns over the U.S. fiscal outlook but also by growing capital demand tied to AI infrastructure investments. He noted that the premium U.S. Treasuries have historically enjoyed as safe and liquid assets has eroded significantly, and mentioned the possibility that the neutral rate estimate may now be higher than in the past.

However, Waller made it clear that he could change his stance depending on upcoming inflation data. He stated, "Currently, I believe policy is only marginally restraining aggregate demand," and indicated that if there are signs of inflation accelerating again, he could support a more restrictive policy.

He went on to say, "If the August inflation data shows evidence that progress toward the 2% target has reversed, making a slight adjustment to the policy stance could help resume the disinflation trend."

Accordingly, the market is closely watching the August CPI and Producer Price Index (PPI) data to be released before the FOMC meeting scheduled for the 15th and 16th. Since both indicators influence the Personal Consumption Expenditures (PCE) Price Index, which the Fed considers most important, they are expected to be key variables in the September rate decision.

This content was produced with the assistance of AI translation services.