Yield Approaching 5% Is Not Due to Market Doubts About the Fed; Warsh: Strong U.S. Economy, AI Capital Spending, and Geopolitical Risks Are the Main Drivers

Fed Chair Warsh said on Wednesday that the recent sustained rise in U.S. long-term Treasury yields does not mean investors are losing confidence in the Fed's ability to control inflation. Instead, he believes that strong U.S. economic performance, surging corporate capital spending, and rising global geopolitical risks are together pushing up long-term borrowing costs. Among these, "hyperscalers," represented by large technology companies, are raising large amounts of financing for artificial intelligence (AI) and data center construction, intensifying competition for capital in financial markets and becoming an important force driving yields higher. Warsh made the remarks after the Fed ended its September monetary policy meeting on Wednesday. That day, the Federal Open Market Committee (FOMC) unanimously decided to raise the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, the first rate hike since July 2023. In his opening remarks, Warsh said U.S. economic activity is expanding at a solid pace, domestic spending remains resilient, productivity growth is strong, and capital investment is very robust; at the same time, inflation remains elevated, so the Fed decided to "withdraw some of its accommodation" to help inflation return to its 2% target in a more timely manner. Surge in AI Capital Spending Intensifies "Capital Competition" Asked why U.S. Treasury yields have continued to climb recently, Warsh placed economic fundamentals and capital demand in an important position during the press conference Q&A session. Warsh said the surge in U.S. capital spending is "real," and large cloud computing and technology companies are raising funds on a massive scale in the market, so competition for capital is also real. This remark links the AI infrastructure investment boom that has swept the technology industry in recent years with rising U.S. long-term interest rates. As large technology companies continue to build data centers, purchase AI chips, and expand power and network infrastructure, related capital expenditures have continued to grow, and companies raising huge amounts of funds through bonds and other markets also means that governments, businesses, and other borrowers are facing intensified competition for capital. In his official opening remarks, Warsh also repeatedly emphasized the strong performance of capital investment. He said the U.S. economy appears to be strengthening further, with several indicators, including new hiring, private-sector income, and business capital investment, improving in recent months, and corporate credit flows especially strong. At the same time, he said the current broad financial conditions can hardly be described as "tight," a judgment also widely shared by FOMC members. Warsh's assessment is broadly consistent with the view of New York Fed President Williams earlier this month. Williams previously said the rise in U.S. Treasury yields mainly reflects the strength of the U.S. economy and its economic outlook, and that this growth outlook is in turn being driven by a sharp increase in AI, data center, and broader technology investment. Therefore, he prefers to view higher long-term interest rates as a reflection of a strong economy. Geopolitical Risks Also Push Up Long-Term Yields In addition to economic growth and capital spending, Warsh also listed the global geopolitical situation as another important factor pushing up long-term interest rates. He said tensions in multiple hotspots around the world are driving long-term yields higher, and their impact is not only reflected in higher spot prices for commodities such as energy, corn, soybeans, or wheat, but also transmitted through channels such as refining margins and processing and supply chain costs, ultimately feeding into the prices of goods in U.S. stores. In fact, Warsh specifically mentioned geopolitical shocks and uncertainty in his opening remarks, and said that against this backdrop, the U.S. economy has still shown considerable resilience. The Fed also noted that the U.S. unemployment rate remains at a low level of about 4.1%, job openings and average weekly hours have both increased, and the four-week average of initial jobless claims remains at a level consistent with full employment. This also forms the important economic backdrop that allowed the Fed to raise rates again this time. Although long-term interest rates have already risen significantly, the labor market has not deteriorated markedly, and economic activity and capital investment have instead continued to show resilience. Disagrees That "Markets Have Lost Confidence in the Fed's Fight Against Inflation" It is worth noting that among the reasons Warsh listed for the rise in long-term yields, he did not include markets losing confidence in the Fed's ability to fight inflation. After U.S. government debt surpassed $40 trillion, fiscal deficits and debt sustainability have also long been regarded by some market participants as important potential factors behind rising long-term Treasury yields. But this time Warsh did not include concerns about fiscal deficits among his main explanations for rising long-term interest rates. Instead, he emphasized the impact of U.S. economic growth, capital investment, and geopolitical factors on long-term interest rates. This does not mean Warsh believes inflation risks have faded. On the contrary, he sent a clear anti-inflation signal at that day's press conference. Warsh said U.S. inflation has been above the Fed's target for more than five consecutive years, so the main focus of current policy remains "price stability" within the dual mandate. He said bluntly, "The fact is simple: inflation is too high, and it has been too high for too long." According to data he disclosed at the press conference, based on the latest CPI and PPI data, U.S. headline PCE for August may have risen about 3.6% year over year, while core PCE and core CPI are running at about 3.2% and 2.4%, respectively. Warsh specifically noted that whether looking over the past six months or 12 months, there are still too many categories of goods and services with price increases exceeding 3%, and input costs for several key commodities have also risen recently. Markets Did Not "Force" the Fed to Raise Rates The recent sharp rise in U.S. Treasury yields also became an important factor for the market in judging the Fed's September policy path. Before this meeting, investors had already heavily bet that the Fed would raise rates by 25 basis points, and some market participants even worried that if the Fed ultimately chose to stand pat, it could instead weaken its anti-inflation credibility and push long-term Treasury yields even higher. However, Warsh explicitly denied that market pricing "forced" the Fed to act. He said he certainly looks at market prices and understands the signals markets are sending, "but today was our own decision." Warsh stressed that what he expressed at the Jackson Hole global central bank symposium in late August was a form of monetary policy discipline, not an advance commitment to a specific policy decision. The standard for action he set at that time was that the Fed must be confident that underlying inflation is falling back toward the 2% target "clearly and at a sufficiently fast pace." By this week's meeting, the FOMC judged that this condition had not been met, so the committee unanimously decided to raise rates. Warsh said the unanimous vote reflects the Fed's determination to restore price stability in a more timely manner.