Treasury secretary floats the idea of a single 'tap the brakes' rate hike
Treasury Secretary Scott Bessent, at right, gave a speech Tuesday night in which he appeared to give Fed Chair Kevin Warsh, at left, permission to hike interest rates.
A lot of ink has been spilled in recent months predicting how new Federal Reserve Chair Kevin Warsh would face the wrath of President Donald Trump unless he could quickly deliver more interest-rate cuts.
But it is starting to look like the Trump White House will not throw a tantrum even if Warsh backs an increase in rates.
After the Fed's meeting last week, markets were caught off guard by the dramatic shift among central-bank officials toward potentially supporting higher rates this year. Nine officials penciled in rate hikes, with six of them expecting more than one hike.
Warsh didn't participate in the forecast, and at his press conference, he refused to comment on the projections. He stressed that the Fed was committed to stabilizing inflation.
Markets seem to have taken the hint. Investors now see a more than 75% chance of a rate hike this year, according to the Atlanta Fed's Market Probability Tracker.
Treasury Secretary Scott Bessent gave a speech to business leaders in New York on Tuesday night and afterwards, Neil Dutta, head of economic research at Renaissance Macro, said he came away with the impression that Bessent had given Warsh "a green light to hike."
In response to a question from the audience, Bessent expressed confidence in Warsh, who was picked by the president to replace outgoing Fed Chair Jerome Powell after a lengthy public contest.
"Warsh will optimize the path for inflation and economic growth. He will be independent and do what he wants," Bessent said.
Dutta expects the Fed to raise interest rates in September. That would be the first hike by the Fed in three years and a sea change in the outlook for financial markets. Coming into this year, there was no sense among investors that the Fed would be raising rates. But early in the year, core inflation excluding food and energy prices started to percolate, and the war with Iran has seemed to bring inflation to a boil.
In a follow-up interview on CNBC Wednesday morning, Bessent said he thinks Warsh will take "the best path" to achieving the Fed's two mandates - reducing inflation and maintaining a strong labor market.
"And look, he came out tough talking about inflation," Bessent said.
Bessent added that Trump also has "every confidence" in Warsh.
"I think we were getting off the airplane in France and the president said, 'I want him to do what's best. That's why I chose him'," Bessent said.
In his televised interview, the Treasury secretary, without being prompted, spoke favorably of an episode in early 1997 when former Fed Chair Alan Greenspan engineered "one tap-on-the-brakes rate hike" that didn't slow the economic expansion. That hike was the first move by the Fed in 18 months and was followed by three rate cuts.
This suggests Bessent thinks conditions today might call for a similar incremental adjustment in rates.
The idea of only a small tightening is also embedded in the Fed's economic forecast, released last week.
The median Fed official in the "dot plot" leans toward one rate hike by the end of 2026 and quickly pivots to pencil in one rate cut in 2027.
Bessent said he expects the U.S. economy to grow at a 3% annual rate this year and added that he thinks inflation will drop as a result of the deal to end the war.
Bessent also said that Trump has a healthy respect for the bond market, noting that traders have shown they have the ability to upset the best-laid plans of prior administrations.
"The bond market has taken out more governments than howitzers," Bessent said.
Late Wednesday, Trump repeated a familiar refrain that Powell should have cut rates more quickly after the president came into office last year.
Asked about the outlook for housing, Trump criticized Powell and said the answer for the struggling sector was to lower rates.
"I know housing better than anybody, maybe anywhere. It's all about the interest rate. Lower the interest rates, you can have all the housing you want," he told reporters at the White House.
-Greg Robb
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 24, 2026 17:28 ET (21:28 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments