Fed's Musalem says AI spending and deficits are keeping yields elevated
Musalem says strong demand for capital from AI investment and government borrowing is likely to keep interest rates higher than in the past
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UpdateThursday, October 8, 2026 at 2:03 PM ET
Musalem said inflation remains elevated, citing persistent demand pressures and supply shocks, and said a timely return to the Fed's 2% target is key to limiting second-round effects on prices. His remarks align him with Fed officials Austan Goolsbee and Lorie Logan, who have both said progress on inflation has stalled. September meeting minutes also showed most Fed officials expect at least one more rate hike by year-end, alongside the unanimous backing for that month's hike already reported.
Federal Reserve Vice Chair Alberto Musalem says the economy is strong and the job market is balanced, with no need to cool demand further to bring down inflation. He says the Fed's best course from here is to keep lowering inflation, though he notes contacts have flagged a risk that consumer spending could soften.
Musalem also points to artificial intelligence investment and government deficits as forces pushing yields higher and raising the government's own borrowing costs. He says strong demand for capital is likely to keep interest rates higher than they have been historically.
His remarks follow other signs of a Fed divided on how much further to tighten. Fed Governor Christopher Waller has said more rate hikes are needed, though not necessarily back to back, and minutes from the Fed's September meeting showed unanimous backing for that month's hike, with almost all participants seeing inflation risks tilted to the upside. Long-dated Treasury yields have stayed elevated since hitting a high on October 1, and the 30-year mortgage rate has climbed for a seventh straight week, reaching 7.4% and breaking above the high set just over a week earlier. SpaceX is in talks with banks and investors to raise $40bn, reportedly to buy Nvidia chips, in a deal said to be led by Apollo, one concrete sign of the capital demand Musalem describes.
Musalem's comments extend a hawkish case he has made repeatedly this cycle, reinforcing the view that strong capital demand keeps borrowing costs structurally higher regardless of when the Fed next moves. But they land in a market still split between that rhetoric and signs of patience from other officials, including Fed Vice Chair Philip Jefferson and New York Fed President John Williams, whose comments had pulled the 10-year Treasury yield off a 5.24% high and cut the odds of an October hike toward 50-50. Musalem's point about investor concern over fiscal sustainability adds a second pressure point on long-dated yields beyond AI-driven demand, feeding the same supply and term-premium dynamics that have kept mortgage rates climbing even as hike-timing odds remain unsettled. Upcoming inflation data is likely to be the tie-breaker between the two views.