- Treasury Secretary Scott Bessent said he is “confident that the Fed chair will optimize the path for both inflation and economic growth,” signaling support for Warsh’s independence at the Economic Club of New York — even as the Fed held rates steady last week despite Trump’s calls for cuts.
- Bessent predicted inflation will retreat as the Iran conflict ends: “Now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target.”
- The Fed’s preferred inflation gauge is expected to show a 4.1% year-over-year jump in May data due Thursday — more than double the 2% target — with core PCE seen at 3.4%; many Fed officials now see a case for rate hikes in 2026.
- Bessent said Trump understands that “bond markets have taken out more governments than howitzers,” signaling the administration grasps the political cost of inflation-driven long-rate increases and won’t pressure Warsh to cut prematurely.
What Happened?
Speaking at the Economic Club of New York on Tuesday, Treasury Secretary Scott Bessent publicly backed newly installed Fed Chair Kevin Warsh and his approach to monetary policy. When asked whether Trump would pressure Warsh to cut rates, Bessent pointed to Trump’s own statement at Warsh’s swearing-in that the Fed chair would be independent. Warsh held rates steady at his first FOMC meeting last week, with many officials now tilting toward hikes rather than cuts given persistent inflation. Bessent also called the two-month Iranian oil sanctions waiver “a general benefit to global markets” and part of an “arc of a negotiation” — framing it as a deliberate step toward bringing energy prices and inflation down.
Why It Matters?
Bessent’s remarks are notable on two levels. First, they publicly align the Treasury with Warsh’s hawkish stance at a moment when markets are pricing in nearly two rate hikes — a significant departure from the rate-cut expectations that prevailed earlier this year. Second, the “bond markets have taken out more governments than howitzers” line is a frank acknowledgment that the administration understands the fiscal and political risks of letting inflation run. That framing — prioritizing long-run bond market confidence over short-run political pressure for cuts — suggests the Trump White House is willing to tolerate a higher-rate environment as long as it comes with credible disinflation. The May PCE data due Thursday will be critical: a hotter-than-expected print could accelerate the rate-hike pricing.
What’s Next?
Thursday’s PCE inflation data is the immediate catalyst. Economists expect headline PCE at 4.1% year-over-year and core at 3.4% — both well above target. Any upside surprise would likely push the market further toward pricing in hikes and hit rate-sensitive assets hard. On the Iran side, if the sanctions waiver leads to meaningfully more oil supply reaching markets, crude and gas prices should continue drifting lower through the summer — Bessent’s core disinflation thesis. But the gap between commodity price relief and the shelter/services inflation that drives PCE suggests inflation will remain above 2% well into 2027, keeping the Fed on a cautious and potentially restrictive path.
Source: Bloomberg
