A high-ranking official from the Federal Reserve indicated that the unexpected costs tied to President Trump’s significant policy measures would impact bond markets, likely resulting in an increase in U.S. interest rates.
During an interview on Thursday, Federal Reserve Governor Christopher Waller noted that bond traders were “surprised” by the lack of “financial restraint” in the House GOP bill aimed at advancing Trump’s agenda.
This week, U.S. Treasury yields surged as the House moved forward with a major bill. This legislation seeks to extend and enhance Trump’s 2017 tax cuts while also reducing funding for Medicaid.
“The market is closely watching fiscal policy… The bill is with both the House and Senate, and there are concerns about its impact on the deficit,” Waller stated on Fox Business Network’s “Mornings with Maria.”
“We’ve seen a $2 trillion deficit over the past few years. This isn’t sustainable. The market is looking for greater financial discipline. There’s a level of concern,” he added.
While the White House claims the bill is neutral regarding the deficit, budget analysts from various viewpoints predict it will increase the $36 trillion national debt.
The Congressional Budget Office (CBO) projected that the tax cuts in this legislation could add approximately $3.7 trillion to the nation’s debt over the next decade.
“Everyone I’ve talked to in the financial markets is looking at this bill and expected much more restraint in financial terms, which they aren’t really seeing,” Waller noted.
Worries from Finance Hawks revolve around the rising national debt, which continues to push up interest rates on Treasury securities, resulting in the government incurring billions just to manage its debt obligations.
The yields on broad Treasury bonds, rising as U.S. debt becomes less appealing, increased on Tuesday while the House was finalizing Trump’s bill. Concerns about national debt also heightened due to weaker-than-expected Treasury bond auctions.
Waller also mentioned a decline in global interest in U.S. stocks and assets, attributed to Trump’s reinforcement of tariffs and a halt to trade with the U.S.
“It seems there’s a growing risk associated with American assets, not just government debt, and we don’t really know how long this trend could last,” Waller remarked.
“If the economy gets back on track, I believe it will start to grow, inflation will stay manageable, and we might see an uptick in demand for U.S. assets,” he added.
A Republican, Waller was appointed by Trump to the Federal Reserve Committee and confirmed by the Senate during Trump’s first term. Observers theorize that Waller could be a top contender to succeed Fed Chairman Jerome Powell when Waller’s current term ends in 2026.
Trump has expressed frustration with the Fed and Powell, particularly because Powell has resisted cutting interest rates this year, impacting the president’s trade strategies on the global market. Other central banks abroad have lowered rates, but the Fed has opted for stability, given the relatively strong U.S. economy and possible inflation concerns.
Waller mentioned that a breakthrough in trade relations with China could pave the way for interest rate reductions by the end of the year.
“Very high tariffs would be quite damaging to the economy. If we can lower tariffs closer to 10%, I believe it will all be settled and implemented by July,” he concluded.
