Fed's Waller: Treasury safety premium gone, neutral rate rising

Federal Reserve Governor Christopher Waller said on Thursday that the traditional safety premium on US government debt has largely disappeared, a shift that is pushing up the neutral level of interest rates and could mean policy is less restrictive than believed.

Speaking at a Varta Wire NEXT Newsmaker event, Waller attributed rising Treasury yields to concerns over the US fiscal trajectory and intensifying competition for capital, particularly from artificial intelligence infrastructure investment. He cited research from Stanford's Hanno Lustig showing the erosion of this premium over several years.

"There's no more premium for safe, liquid U.S. government debt," Waller said, noting this has led him to raise his estimate of the neutral rate. "Which means higher policy rates for any given rate of inflation — maybe you're not as restrictive as you thought you were."

His remarks helped push Treasury yields lower on Thursday, with the benchmark falling to 4.74% after touching 4.818% the previous day, its highest level since November 2023.

On fiscal policy, Waller said the US cannot simply grow its way out of its roughly $40 trillion debt load. Structural deficits, currently around 6% of GDP, would need to be brought closer to zero. He dismissed Treasury Secretary Scott Bessent's goal of 3% GDP growth with 2% inflation as insufficient to reduce the deficit as a share of GDP.

Waller also downplayed the effectiveness of Bessent's plan to double buybacks of longer-dated Treasuries, with the first operation of at least $4 billion scheduled for September 10. "I've never believed as an economist... that these kind of short-run interventions do much," he said, adding that the move remains the Treasury Secretary's prerogative.

In prepared remarks, Waller said he is inclined to keep rates steady at the next policy meeting if upcoming data confirms cooling inflation, urging patience: "Give disinflation a chance."