Federal Reserve Governor Christopher Waller signaled he would support holding interest rates unchanged if inflation continues to decline toward the Fed's 2% target, sparking a Treasury rally and easing rate-hike bets. Waller said his decision will be heavily influenced by August inflation data, and he would consider a rate hike if inflation comes in hot. The policy-sensitive two-year Treasury yield retreated as much as seven basis points to 4.30%, while the 10-year yield fell three basis points to 4.75% and the 30-year yield also dropped three basis points to 5.23%. Fed funds futures now show roughly split odds between a September hike and a pause, down from 63% odds of a 25-basis-point increase a day earlier. Swap contracts tied to the September policy decision now price in only about half of a quarter-point increase, with a cumulative 33 basis points of tightening by year-end. DoubleLine Deputy Chief Investment Officer Jeffrey Sherman called Waller the "tying vote" on a finely balanced Federal Open Market Committee, but cautioned that persistent inflation pressures remain, and argued the Fed needs to deliver a rate hike to anchor longer-term yields.
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