Waller’s Dovish Turn Reshapes Rate Path as AI Demand Distorts Trade Data
TREE NEWS reports: Federal Reserve Governor Christopher Waller delivered his clearest dovish signal of the tightening cycle on Thursday, sending U.S. equities higher and pulling rate-hike expectations sharply lower. The S&P 500 climbed 1.06% to 7,747.71, its best daily gain since August 4, while the Nasdaq rose 1.40% and the Dow gained 1.18%. The 10-year Treasury yield eased to around 4.77%.
Market implications
Waller said that if inflation data over the next two weeks continues to show cooling, he would favor holding rates at 3.50%–3.75% in September. Traders responded by slashing the probability of a September hike from 63% to 52%. This pivot is significant because it marks the first time a Fed official has explicitly tied a pause to incoming data, creating a clear binary event for markets.
However, the macro backdrop is not uniformly dovish. The August ISM services PMI rose to 55.4, a six-month high, with the prices-paid index jumping to 72.6—the highest since August 2022. Energy costs are feeding through to services inflation, suggesting the disinflation path remains bumpy. Waller’s condition of ‘continued cooling’ is far from guaranteed.
AI’s macro footprint
Beyond the Fed, the AI boom is now visibly reshaping macro statistics. The U.S. trade deficit widened 24.4% in July to $88.6 billion, the largest since March 2025, driven by a surge in capital goods imports—computer components posted their biggest monthly gain on record. AI infrastructure spending is no longer just a corporate earnings story; it is a measurable drag on Q3 GDP, potentially exceeding 1.3 percentage points.
Currency and cross-asset moves
The yen strengthened nearly 3% over two days, breaking below 156 per dollar, as Bank of Japan hawkish comments fueled expectations of a September rate hike. The dollar index slipped 0.11% to 99.51. Gold and Treasuries rallied alongside equities, a rare risk-on/rates-down combination.
Forward-looking perspective
Tonight’s August nonfarm payrolls report is the last employment data before the September FOMC meeting and will test Waller’s narrative. A weak print could push hike odds below 50%, while a strong number would force markets to reprice. Meanwhile, the AI-driven import surge complicates the Fed’s inflation fight, as it reflects both demand strength and supply-chain pressures. Investors should brace for continued volatility as the data-dependent Fed navigates a diverging macro landscape.
