Fed's Waller says safety premium for Treasuries is gone, pushing neutral rate higher

There is no more premium for safe, liquid U.S. government debt, pushing the neutral level of interest rates higher, Federal Reserve Governor Christopher Waller told a Reuters NEXT Newsmaker event on Thursday.

Waller also told Reuters NEXT that for the United States to grow its way out of ‌a $40 trillion debt load, ⁠structural deficits would ⁠have to be brought closer to zero percent of GDP, from this fiscal year's level of around 6%.

Waller said that yields have been rising due to concerns about ​the U.S. fiscal situation, but also because of competition for capital from artificial intelligence infrastructure investment. He said there was also growing evidence that the safety ​premium for U.S. Treasury debt that had pushed bond prices up and held yields down had largely disappeared.


He cited recent research from Stanford Graduate School of Business finance professor Hanno Lustig showing this premium has been eroded over several years.

Waller said he has long worried ​that, "There's no more premium for safe, liquid U.S. government debt."

"And that has been leading me ⁠to raise ‌my neutral rate estimate, which means higher policy rates for any given rate of inflation - maybe you're not ​as restrictive as you ​thought you were," he added.

In prepared remarks, Waller said that if upcoming data confirms that inflation pressures are ⁠cooling off, he is inclined to argue in favor of keeping interest rates steady ​at the U.S. central bank's next policy meeting.

He added that he was inclined to be ​patient on interest rates and incoming data to confirm that price pressures are cooling, saying, "Give disinflation a chance."

Waller's comments helped push Treasury yields lower on Thursday, with the benchmark Treasury falling to 4.74% after hitting 4.818% on Wednesday, its highest since November 1, 2023.

'UNSUSTAINABLE' 3% OF GDP DEFICIT

Asked whether it was feasible for the U.S. to grow its way out of debt, as U.S. Treasury Secretary Scott Bessent has advocated, Waller said this was possible "if you can get the structural deficits down closer to zero."

Bessent has set a goal of reducing the ‌annual U.S. budget deficit to 3% of GDP, along with 3% real GDP growth and increased energy production of 3 million barrels of oil per day.

The U.S. deficit in fiscal 2025 fell to 5.9% of GDP ​from 6.3% in fiscal ​2024. But Bessent has acknowledged that ⁠the deficit for fiscal 2026 will be larger than last year due to tariff refunds after the U.S. Supreme Court struck down President Donald Trump's tariffs under a broad emergency law.

Waller said that growing out of the debt through inflation, which is what happened after World ​War Two, is "not a good outcome" for making Americans better off in the current environment.

But he said even 3% GDP growth with 2% inflation would not bring down the budget deficit in real terms as a percentage of GDP.

Waller also dismissed the effectiveness of Bessent's move to double the size of bond buybacks for longer-dated Treasuries. The first operation of at least $4 billion is due on September 10.

"I've never believed as an economist, not a policymaker, that these kind of short-run interventions do much," Waller said. "But you know, if you want to do them, that's Bessent's - that's his - prerogative."