US Treasury Secretary Scott Bessent stated on Tuesday that he is not convinced of the need for interest rate hikes. Bessent defended embattled Federal Reserve Chairman Kevin Walsh, arguing that the market's negative reaction to Walsh's press conference last week simply indicates traders are adjusting to the central bank reducing its hands-on guidance.
"I think this is a 'detox' for both the financial markets and financial journalists," Bessent said in an interview, adding that Walsh was wise to avoid providing "forward guidance" or explicitly signaling where rates might go. He said this approach was partly responsible for the inflation surge five years ago and would make it difficult to change policy direction if circumstances required.
"I started on Wall Street in 1984, and back then you never knew what the Fed was going to do. You had to position yourself accordingly, and you actually had to do your own homework," Bessent noted in the interview.
Meanwhile, analysts argue that the issue is not the lack of forward guidance, but rather a misunderstanding of how Walsh views the economy. Walsh has repeatedly stated his commitment to bringing inflation back to the Fed's 2% target, but has not explained how he intends to achieve this. Most economists believe controlling inflation means raising interest rates.
Although the Fed operates independently of the White House, both investors and policymakers are watching how closely Walsh aligns with the Trump administration's stance, which has been pushing for rate cuts for months. In last week's press conference, Walsh did not explain why he supported the Fed's July decision to keep rates unchanged at 3.5%-3.75%. Three officials dissented from the decision, issuing strong statements arguing that inflation is moving in the wrong direction and that the central bank needs to tighten monetary policy.
Mark Cabana, head of US rates strategy at Bank of America Global Research, compared Walsh to someone who claims to be determined to lose 15 pounds but doesn't exercise, diet, or use GLP-1 drugs. Cabana said in an interview on Monday that determination is good, but unless you know how he plans to do it, no one will believe him. "You can't fool the bond market. You can't do it," he said, referring to the bond market—a key indicator of how investors view the economy's health. "The bond market sees right through it, and that's our interpretation of what happened last week." Cabana said forcing traders to blindly bet on the Fed's policy path would push rates higher and tighten financial conditions.
Former New York Fed President Bill Dudley said rising long-term bond yields indicate the US central bank has lost credibility. This makes the Fed's job harder, as a skeptical market demands higher rates. "Walsh's silence is deafening," Dudley said in an interview on Monday.
Robert Brusca, chief economist at FAO Economics, said Walsh is a victim of double standards. "There's a persistent suspicion that Kevin Walsh is a Trump man at heart and will follow Trump's instructions. Unless he proves otherwise, people may not truly trust him," Brusca wrote in an email to clients.
Bessent's comments suggest the White House continues to support President Donald Trump's Fed pick, despite rising bond prices raising government borrowing costs and potentially weighing on the economy. In the interview, Bessent said he is not convinced of the need for rate hikes. "What exactly would raising short-term rates accomplish?" Bessent asked. He said raising the Fed's benchmark rate would not impact the economy for a year or more. "Core inflation, excluding the volatile energy component, has been very calm, and I think we'll continue to see that," Bessent stated.
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