Federal Reserve Chair Jerome Powell stated on Wednesday that the recent climb in US long-term Treasury yields does not signal a loss of investor confidence in the Fed's ability to control inflation. Instead, he attributed the rise in long-term borrowing costs to a robust US economy, surging corporate capital expenditures, and heightened global geopolitical risks. Notably, "hyperscale cloud providers," led by major technology firms, are aggressively financing artificial intelligence and data center projects, intensifying competition for capital in financial markets and exerting significant upward pressure on yields.

Powell made these remarks following the conclusion of the Fed's September monetary policy meeting, where the Federal Open Market Committee (FOMC) unanimously voted to raise the federal funds rate target range by 25 basis points to 3.75%-4.00%. This marks the first rate hike since July 2023. In his opening statement, Powell noted that US economic activity is expanding at a solid pace, with resilient domestic spending, strong productivity growth, and vigorous capital investment. Meanwhile, inflation remains elevated, prompting the Fed to "withdraw some policy accommodation" to facilitate a more timely return of inflation to the 2% target.

A sharp increase in AI-related capital expenditure is amplifying the "scramble for funds" effect. Addressing the persistent rise in Treasury yields during the press conference Q&A session, Powell placed economic fundamentals and capital demand at the forefront of his explanation. He said the surge in US capital spending is "real," with large cloud computing and technology companies raising substantial funds in the market, making capital competition equally real. This statement directly links the tech industry's recent AI infrastructure investment boom to higher long-term US interest rates.

As major tech firms continue to build data centers, procure AI chips, and expand power and network infrastructure, their capital expenditure scales are growing. Corporate reliance on bond markets to raise enormous sums intensifies competition for capital among governments, businesses, and other borrowers. Powell also emphasized the strength of capital investment multiple times in his official opening remarks, stating that the US economy appears to be strengthening further, with indicators such as new hiring, private sector income, and business capital investment improving in recent months. Corporate credit flows have been particularly robust. He argued that the broad financial environment can hardly be described as "tight," a view widely shared by FOMC members.

Powell's assessment aligns with New York Fed President John Williams' comments earlier this month. Williams had stated that the rise in Treasury yields primarily reflects the strength of the US economy and its outlook, which is bolstered by significant increases in AI, data center, and broader technology investment. He thus views higher long-term rates as a reflection of economic vitality.

Geopolitical risks are also contributing to higher long-term yields. Beyond economic growth and capital spending, Powell cited global geopolitical conditions as another key factor pushing long-term rates upward. He indicated that tensions in several hotspots worldwide are driving long-term yields higher, with effects transmitted not only through higher spot prices for commodities like energy, corn, soybeans, or wheat, but also through refining margins and processing and supply chain costs, ultimately feeding into prices of goods at US stores.

In his opening remarks, Powell specifically highlighted geopolitical shocks and uncertainty, noting that the US economy has shown considerable resilience despite these headwinds. The Fed also observed that the unemployment rate remains low at approximately 4.1%, with job openings and weekly hours worked increasing, and the four-week average of initial jobless claims remaining consistent with full employment. This solid economic backdrop underpinned the Fed's decision to resume rate hikes.

Despite noticeably higher long-term rates, the labor market has not deteriorated significantly, while economic activity and capital investment continue to show resilience. Notably, Powell's list of reasons for rising long-term yields does not include waning market confidence in the Fed's inflation-fighting resolve. Although the US government debt surpassing $40 trillion has led some market participants to view fiscal deficits and debt sustainability as potential drivers of higher long-term yields, Powell did not include fiscal deficit concerns among his primary explanations this time. Instead, he emphasized the impact of economic growth, capital investment, and geopolitical factors on long-term rates.

This does not imply Powell believes inflation risks have subsided. On the contrary, he delivered a clear anti-inflation message during the press conference. Powell stated that inflation has exceeded the Fed's target for over five consecutive years, making "price stability" the primary focus of current policy under the dual mandate. He bluntly remarked, "The simple fact is that inflation is too high and has been too high for too long." According to data he disclosed, estimates based on the latest CPI and PPI reports suggest the August headline PCE inflation may have risen by approximately 3.6% year-over-year, with core PCE and core CPI running at around 3.2% and 2.4%, respectively.

Powell specifically noted that whether looking at the past six or twelve months, too many goods and services categories still show price increases exceeding 3%, and recent input costs for several key commodities have also risen. Regarding the recent sharp climb in Treasury yields, which had become a key factor in market expectations for the Fed's September policy path, investors had heavily priced in a 25 basis point hike ahead of the meeting. Some market participants even worried that if the Fed chose to hold rates steady, it could undermine its inflation-fighting credibility and further push long-term yields higher.

However, Powell explicitly denied that market pricing had "forced" the Fed's hand. He acknowledged that he certainly monitors market prices and understands the signals they convey, "but today's decision was ours." Powell emphasized that his remarks at the Jackson Hole global central bank symposium in late August expressed a commitment to monetary policy discipline, not an advance commitment to any specific policy decision. At that time, his stated criteria for action was that the Fed must be confident that underlying inflation was "clearly and sufficiently quickly" returning to the 2% target. By this week's meeting, the FOMC determined that condition had not been met, leading to the unanimous decision to raise rates. Powell stated that the unanimous vote reflects the Fed's determination to restore price stability in a more timely manner.