Recent comments at the Fed’s Jackson Hole Symposium and the G20 finance meeting affected markets and have implications for the risk-free rate assumptions underpinning Kroll’s valuation work. Despite these developments, we continue to regard yields on long-term U.S. Treasury securities as an appropriate proxy for the risk-free rate.
Jackson Hole: A Hawkish Signal from the Federal Reserve
In his remarks at the Jackson Hole symposium, Federal Reserve Chairman Kevin Warsh acknowledged that inflation remains elevated, with PCE inflation at 3.7%, and said recent softer readings do not yet demonstrate meaningful improvement in underlying trends. Markets interpreted the remarks as hawkish because they clarified his assessment of the economy and inflation outlook. He also questioned the continued usefulness of forward guidance, arguing that markets should assess underlying fundamentals rather than wait to be led by the Fed. In addition, he highlighted the uncertainty that artificial intelligence introduces into the outlook for growth and productivity.
Markets responded quickly. The market-implied probability of a 25-basis-point rate increase at the September FOMC meeting rose from approximately 36% on the eve of the speech to roughly 57% immediately afterward and continued to increase, while short-term Treasury yields also increased.
G20 Finance Meeting: Renewed Focus on Fiscal Sustainability
At the G20 finance ministers’ meeting, Treasury Secretary Scott Bessent downplayed the concerns that the rising long-term Treasury yields reflect the U.S. fiscal position and emphasized economic growth as a means of addressing elevated global debt burdens. He also said recent increases in long-term Treasury yields reflected, at least in part, a stronger growth outlook and an exceptional demand for capital associated with investments in artificial intelligence.
Markets nevertheless remained sensitive to the broader global fiscal outlook. During the wider global bond-market sell-off on Tuesday September 1, the 20-year U.S. Treasury yield rose to 5.27% – just three basis points below the 5.30% high reached immediately before the Treasury buyback program began in mid-August.
Implications for Our Valuation Framework
These developments have two implications for valuation. First, Treasury yields respond to changing expectations for monetary policy, inflation, economic growth, fiscal sustainability and the term premium. Second, such changes affect the level and interpretation of Treasury yields but do not, by themselves, make Treasuries an inappropriate base rate for USD-denominated discount rates.
The recent increase in Treasury yields may reflect higher expected real rates, higher inflation expectations or a larger term premium associated with fiscal and duration concerns. Each factor can raise the discount rate, but none necessarily invalidates Treasuries as the risk-free rate proxy.
In valuation, “risk-free” is a convention referring to a default-free or negligible-default-risk asset that provides a market-observable base return in the relevant currency. It does not mean the instrument is free from inflation risk, interest-rate risk, liquidity risk or price volatility.
Three considerations support the continuing use of U.S. Treasury rates as the risk-free proxy for USD-denominated discount rates:
- The sovereign rating downgrades in 2011, 2023 and 2025 generated periods of market volatility, but no persistent repricing that can be attributed to the downgrades alone rather than to monetary policy, inflation, growth expectations, fiscal developments or changes in the term premium.
- The U.S. dollar remains the dominant global reserve and payment currency, despite a gradual decline in its share, and no credible alternative currently matches its scale and breadth of use.
- The Treasury market remains unmatched in depth, liquidity, transparency and availability across maturities – characteristics that are essential for an observable and investable benchmark.
The relevant analytical question is not whether Treasuries are literally “risk-free,” but how much of the current yield reflects expected real rates, expected inflation and the term premium required for holding longer-duration government debt. That decomposition is important when interpreting the cost of equity and comparing discount rates across valuation dates.
Accordingly, as of September 2, 2026, Kroll is reaffirming its recommended U.S. equity risk premium of 5.0% when developing USD-denominated discount rates. This recommendation should be matched with the spot 20-year U.S. Treasury yield as of the valuation date. This guidance remains in effect until further notice.
