The yield on the benchmark U.S. 10-year Treasury note fell to around 4.74% on Thursday, extending its decline from the previous session as investors reduced expectations for a Federal Reserve interest-rate increase following comments from Governor Christopher Waller.
The 10-year yield had climbed as high as 4.81% earlier this week, its highest level since October 2023, amid concerns that elevated inflation and higher energy prices could force the Fed to tighten monetary policy further.
Waller Opens Door to Holding Rates Steady
Treasury prices gained after Waller said recent inflation data had shown signs of improvement and suggested he could support leaving interest rates unchanged at the Fed’s September meeting if that trend continues.
“If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level,” Waller said Thursday.
He also cautioned that another rate increase remains possible if upcoming data shows renewed inflation pressure.
“If inflation comes in hot, I would consider a rate hike,” Waller said. The current federal funds target range of 3.50% to 3.75% is only slightly restrictive, according to the governor.
The remarks pushed yields lower across the Treasury curve. The two-year yield fell to around 4.32%, while the 30-year yield declined to approximately 5.23%.
September Rate-Hike Probability Drops to About 50%
Investors subsequently reduced bets on another increase in borrowing costs. Markets were pricing approximately a 50% probability of a September rate hike, down from more than 60% earlier in the week.
Expectations for tighter policy had increased following Federal Reserve Chair Kevin Warsh’s remarks at the Jackson Hole symposium, where he signaled that policymakers remained concerned about inflation and could have more work to do to bring price growth under control.
Waller offered a somewhat different assessment Thursday. While acknowledging that inflation remains meaningfully above the Fed’s 2% goal, he said recent data showed encouraging signs of disinflation.
Three-month core inflation has declined from 4.76% in February to 3.05% through July, according to figures cited by Waller.
Jobs and Inflation Data Move Into Focus
Investors are now awaiting Friday’s U.S. employment report for another assessment of labor-market conditions.
Waller said the labor market remains stable and employment is near its maximum sustainable level, making incoming inflation data particularly important for his September policy decision.
The next major inflation report is scheduled for Sept. 11, just days before the Fed’s Sept. 15-16 policy meeting. Waller said the August inflation figures will heavily influence whether he supports maintaining the current rate or tightening policy further.
The decline in Treasury yields on Thursday reflected the latest repricing of those expectations, with investors balancing still-elevated inflation against emerging evidence that underlying price pressures may be moderating.
