US Fed’s Waller says safety premium for Treasuries is gone, pushing neutral rate higher
Waller‘s comments helped push Treasury yields lower on Thursday
Federal Reserve Governor Christopher Waller stated on Thursday that the safety premium for US Treasuries no longer exists, which has led to higher neutral interest rates. This change in the market dynamics has resulted in a decline in yields for the benchmark US Treasury. Waller, while acknowledging the importance of the US growing its way out of a US$40 trillion debt load, emphasized that structural deficits need to be brought closer to zero per cent of GDP, from the current 6 per cent.
He also pointed out that the safety premium has been eroded over several years, as shown by research from Stanford Graduate School of Business finance professor Hanno Lustig. Waller has long expressed concern about the disappearance of this premium for safe, liquid US government debt, which has led him to increase his estimate of the neutral rate.
This would mean higher policy rates for any given inflation rate, potentially leading to less restrictive monetary policy than initially anticipated.
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