Federal Reserve Governor Christopher Waller indicated a preference for holding interest rates steady as long as inflation continues to moderate, sparking a rally in U.S. Treasuries.

The advance on Thursday pushed yields lower across the curve, with two-year notes leading the gains given their heightened sensitivity to Fed policy moves. After briefly surpassing 4.40% earlier this week — a level not seen since January 2025 — as traders priced in a possible rate hike this month, the two-year yield dropped as much as 7 basis points to 4.30% following Waller's comments.

The U.S. dollar slipped as much as 0.5%, weakening against all of its G-10 counterparts. According to Tom di Galoma, managing director at Mischler Financial Group, Waller's remarks provided a sense of relief for the Treasury market. "It looks like he remains in the camp of keeping rates unchanged until more inflation data comes in," he said.

Waller stated that he is "willing to support keeping the policy rate at its current level" if inflation continues to ease toward the Fed's 2% target. The inflation gauge stood at 3.7% in July, down from 4.1% in May. The August personal consumption expenditures price index won't be released until after the Fed's September meeting. However, another inflation measure — the consumer price index — will report August data on September 11. The CPI rose 3.4% year-over-year in July, a slowdown from May's 4.2% increase.

Over the past year, Waller's policy stance has shifted multiple times. In July 2025 and January 2026, he dissented against the Fed's decisions to hold rates steady, advocating for cuts. But in speeches on May 22 and July 13 of this year, he pivoted to a more hawkish position, driving Treasury yields higher.

Following Waller's comments, market expectations for a Fed rate hike have cooled. Swap contracts tied to the next policy decision on September 16 currently price in roughly a coin-flip chance of a 25-basis-point increase, down from about 70% earlier this week. The market now prices in a cumulative 34 basis points of tightening by year-end, lower than the 41 basis points seen previously.

Thursday's U.S. economic data was mixed. Weekly jobless claims remained near the lower end of their post-pandemic range. Meanwhile, the August services activity index rose more than expected, though its employment sub-index contracted for a second consecutive month and the prices-paid gauge climbed to a four-year high.