Federal Reserve Governor Christopher Waller stated that the sharp rise in long-term U.S. Treasury yields is helping to restrain demand in interest-rate-sensitive sectors such as housing and automobiles, thereby exerting a degree of monetary policy tightening effect.

"Will higher yields have an impact on interest-rate-sensitive sectors like housing and autos? Of course they will," Waller said Tuesday at an economic forum in New Delhi. He noted that while this was not the Fed's intention, the rise in yields has indeed "played a certain role."

Yields have climbed to multi-decade highs across the U.S. and other developed economies, driven by inflation exacerbated by the U.S.-Iran war and concerns over budget gaps, leading to tighter financial conditions. Traders promptly scaled back their rate hike expectations. Data shows that since mid-September, the rate hike magnitude priced into swap contracts across eight major economies has fallen by nearly 200 basis points.

Last week, Waller said further rate hikes may be needed to curb inflation, but added that officials have some flexibility on timing when considering another increase. The Federal Open Market Committee unanimously voted to raise rates last month, the first time since 2023. Investors initially believed there was a high probability the Fed would hike again at its October 27-28 meeting. But after two senior officials indicated that policymakers have time to assess economic conditions before acting again, investors reduced those bets. Economists expect Wednesday's inflation data to show that headline inflation accelerated in September due to the U.S.-Iran war pushing up energy costs, while core price gains are expected to slow.

AI Investment Is Fueling Inflation

Waller said AI is also driving prices higher, as the rapid buildout of AI infrastructure stimulates demand. "Obviously, if you're spending trillions of dollars in the AI space, you need to buy all the related equipment, and your demand is completely inelastic, so you're willing to pay whatever the price is," Waller said. "All types of semiconductor prices will rise, and that ultimately spills over to everyone who uses these products. This is exactly what we're starting to see in the United States."

Waller is among many Fed officials who hope AI will eventually boost productivity. If AI can enhance productivity, the economy could achieve stronger growth without triggering excessive inflation. But he said those returns may still be years away, while AI-driven price pressures could persist for two to three years.

Fed Independence Faces Threats

When asked about the threat posed by U.S. President Donald Trump to his job, Waller said he believes Congress and U.S. courts can uphold the Fed's autonomy. Trump has repeatedly attacked the Fed for refusing to cut rates. "This administration poses a threat to the Fed's independence," Waller said. "So far, that threat has not really succeeded."

Waller was appointed by Trump during his first term. During his second presidential term, Trump has attempted to remove then-Chair Jerome Powell (who remains a Fed governor) and Governor Lisa Cook in order to install his own nominees. This pressure campaign has reignited debate over how much influence a president should have over monetary policy. Most economists believe central banks achieve better inflation control when they manage monetary policy independently.

Trump's pressure has not ended. This month, the White House announced the formation of a committee to investigate mortgage fraud allegations against Cook. Cook will defend herself at a White House hearing on November 5. Previously, the U.S. Supreme Court had blocked Trump from removing Cook based on those allegations. Cook has said the allegations were fabricated by Trump to legally justify removing her.