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

Federal Reserve Governor Christopher Waller stated on Thursday that the safety premium for U.S. Treasuries has vanished, causing the neutral interest rate to climb. Waller further suggested that to reduce the U.S. debt of $40 trillion, structural deficits need to approach zero percent of GDP, from the current 6%. He noted that rising yields can be attributed to concerns about the fiscal situation and competition for capital driven by artificial intelligence infrastructure investment.

Waller cited Stanford's Lustig research stating that the safety premium for U.S. Treasury debt has significantly diminished over the past few years. The Fed official acknowledged his growing belief that a higher neutral rate is warranted, implying that central bank policy rates could increase for a given inflation level. If inflation signs improve, Waller would advocate for maintaining steady interest rates during the next Federal Reserve meeting.

He expressed patience for data to confirm declining price pressures. Regarding the U.S. debt issue, Waller believed growth could help if structural deficits shrink closer to zero. Treasury Secretary Scott Bessent aspires to slash the annual deficit to 3% of GDP, coupled with 3% annual GDP growth and an additional 3 million barrels of oil daily.

The fiscal 2025 deficit stands at 5.9% of GDP, but the expected fiscal 2026 deficit will be higher due to the Supreme Court overturning Trump's tariffs. Waller dismissed the efficacy of Bessent's plan to double bond buybacks for longer-dated Treasuries, scheduled to commence on September 10.