The recent selloff in the US bond market is being driven by increased government borrowing and a surge in financing needs for artificial intelligence development, rather than doubts about the Federal Reserve's credibility, according to St. Louis Fed President Alberto Musalem.
Speaking to CNBC on Thursday, Musalem said, "There is a competition for capital between US government financing and AI development. Right now, AI development is securing financing both domestically and globally."
He noted, "Interestingly, inflation expectations remain stable, and the Fed's credibility has not been called into question." Bond yields can also climb when investors question the Fed's determination to contain inflation.
Musalem, who holds no voting rights on monetary policy this year, reiterated that he would have preferred a rate hike at the Fed's July meeting to temper inflation that remains elevated. He stated that he sees a higher probability that inflation will not return to the Fed's 2% target within the next 18 months without further rate increases.
At their July meeting, Fed officials held rates steady for a fifth consecutive time and gave no indication of an imminent hike, though three policymakers dissented in favor of raising rates. Several regional Fed presidents without voting rights, including Musalem, have also indicated they would have supported a hike.
In recent weeks, investors have persistently sold off US Treasuries, pushing the 30-year yield to its highest level since 2007.
Comments