NEW YORK, Sept 16 (Reuters) - Federal Reserve Chairman Kevin Warsh suggested on Wednesday that among the forces pushing up bond yields, a loss in confidence in the central bank's inflation fight mettle is not on that list.
Instead, the rise in borrowing costs owes to economic strength and surging capital expenditures that have increased the competition for capital, Warsh said in a press conference following the Fed’s latest meeting.
“The surge in capital expenditures, which I referenced in my remarks,
is real, and the so-called hyperscalers are out in the market raising funding, and so the competition for capital is real,” Warsh said.
And finally, he said unsettled political factors around the world are also driving up credit costs.
“The situation in hotspots around the world are driving long-term yields,” Warsh said. “It's not simply spot prices of energy or spot prices for corn or soybeans or wheat, but it's the difference between those spot prices and so-called crack spreads, what that means for products that find their way into stores across the country,” the official said.
Warsh’s list jibed with comments from New York Fed President John Williams from earlier in the month. He’d told CNBC in an interview that what is driving yields up “is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general, so I see this as more of a reflection of the strength of the economy.”
Not on that list of factors? A direct worry about inflation or the Fed’s ability to get high price pressures back to the Fed’s 2% target. Also not on the list? Worries about the sustainability of U.S. deficits as the U.S. government debt level has cracked $40 trillion.
The rise in yields had heavily factored into market thinking on the outcome of the meeting, where officials voted unanimously to raise the central bank’s overnight target rate by a quarter percentage point to between 3.75% and 4%.
Markets had priced strongly for the prospect that the Fed would tighten monetary policy following comments Warsh made at the end of August at the Kansas City Fed's Jackson Hole, Wyoming research conference. Then, after saying little about monetary policy, Warsh said the Fed would act to ensure inflation would return to the 2% target.
Warsh explained in his press conference that the markets did not box the Fed into a hike. Some in markets worried if the Fed did not lift rates it would drive yields even higher than they are now.
“I'll observe market prices and see what they had to say. But today was our decision,” Warsh told reporters.
(Reporting by Michael S. Derby; Editing by Chris Reese and Andrea Ricci )
