Treasury secretary questions the need for an interest-rate hike
Treasury Scott Bessent, shown here during a Cabinet meeting at Camp David last Friday, said on Tuesday that he wasn't convinced interest rates need to be raised.
Treasury Secretary Scott Bessent on Tuesday defended embattled Federal Reserve Chair Kevin Warsh, saying the market's poor reaction to Warsh's press conference last week was just a sign traders were adjusting to less hand-holding from the central bank.
"I think of this as a detox, for both the financial markets and financial journalists," Bessent said in an interview on CNBC, adding that it was smart for Warsh to avoid giving the market "forward guidance," or laying out the likely path of rates. Doing so contributed to the inflation spike more than five years ago, he said, and makes it hard to change course if conditions require.
"I began on Wall Street in 1984, and you never knew what the Fed was going to do, and you had to be positioned accordingly, and you actually had to do your own work," Bessent said in the interview.
Analysts, meanwhile, said that lack of forward guidance wasn't the problem - rather, it's that they don't understand how Warsh thinks about the economy.
Warsh has said repeatedly that he is committed to bringing inflation back to the Fed's 2% target. But he hasn't said how he intends to do that.
Most economists think getting inflation under control means raising interest rates. Although the Fed operates independently from the White House, investors and policymakers are watching to see how closely Warsh hews to the position of the Trump administration, whose officials have been pushing rate cuts for months.
Opinion: Warsh's Fed is failing to stick to its own principles for good monetary policy
At his press conference last week, Warsh did not explain why he supported the decision to keep rates unchanged in a range of 3.5%-3.75% at the Fed's July meeting. Three officials dissented from that decision and have issued forceful statements arguing that inflation is moving in the wrong direction and that the central bank needs to tighten monetary policy.
Mark Cabana, head of rates strategy at BofA Global Research, likened Warsh to a person saying they are firmly committed to losing 15 pounds but without exercise, diet or using GLP-1 drugs. It is nice to be resolute, Cabana said in an interview on Bloomberg on Monday, but no one will believe you unless they know how you intend to do it.
"You can't fool the bond. You can't do it," he said, referring to the bond market, an important signal of how investors view the health of the economy. "The bond will see thought it, and that is our interpretation of what happened last week."
Cabana said that forcing traders to bet blindly on the path of Fed policy will build in higher rates and tighten financial conditions.
Former New York Fed President Bill Dudley said the rise in long bond rates signaled a loss of credibility for the U.S. central bank. This makes the Fed's job harder, because the market demands higher rates when it doubts the central bank.
"The silence from Warsh was really quite deafening," Dudley said in a Bloomberg interview on Monday.
Robert Brusca, chief economist at FAO Economics, said Warsh was the victim of a double standard.
"There are always deep suspicions that Kevin Warsh is in his bones Trump's man, and he will do Trump's bidding. And it's not until he demonstrates that's not true that people will probably truly trust him," Brusca said in an email to clients.
Bessent's comments show the White House is sticking by President Donald Trump's Fed pick, even though the rise in bond prices raises the cost of government borrowing and could slow the economy.
In the interview, Bessent said he wasn't convinced that interest rates needed to rise.
"What does an increase in the short-term rate actually do?" Bessent asked. Lifting the Fed's benchmark rate wouldn't impact the economy for a year or more, he said.
"Core inflation away from the fast-moving segments that are impacted by energy have been very quiescent, and I think we are going to continue to see that," Bessent said.
-Greg Robb
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