Bessent outlines reasons Fed could skip September hike despite Warsh comments

Bessent's remarks came after Fed Chair Kevin Warsh's Jackson Hole debut, which had moved September hike odds to near 60% on the CME FedWatch tool, down from about 66% beforehand. The US dollar edged lower following the interview, with Bessent's supply shock argument cited as a possible catalyst, though the implied probability of a hike was little changed that day. Bessent and Warsh traveled together to the G20, a detail Bessent dismissed as just tennis talk, but the timing has led to speculation that his comments were meant to give Warsh cover to avoid tightening. The final decision rests with the broader Fed committee, where several officials have continued to signal support for a hike, so the gap between Bessent's framing and the voting bloc's tone remains a source of uncertainty into the meeting.

Earlier:

• Bessent said oil prices are set to decline and the US 10-year yield is at the same level as when President Trump took office

Bessent did not predict the Fed's September move, but his supply shock reasoning suggests a case for keeping rates unchanged rather than increasing them.

Summary:

• Bessent declined to speculate on the September Fed decision, but offered reasoning against a rate increase.
• His key point: the Fed typically does not raise rates during a supply shock unless second- or third-order effects appear, and he noted core inflation has stayed very restrained.
• He also highlighted an expected productivity boom following the AI buildout as a disinflationary factor.
• The remarks followed Fed Chair Kevin Warsh's first Jackson Hole speech on Friday, after which September hike odds rose to near 60% on the FedWatch tool, down from about 66% shortly before.
• Bessent and Warsh traveled together to the G20, which some saw as context for the timing of Bessent's comments, though he said they talked about tennis.
• Beyond rates, Bessent discussed falling oil prices, Iran's negotiating stance, US bond market resilience, the 10-year yield, and said Japanese authorities prefer a stronger yen; he was critical of Canada, stating its PM is not acting in the country's best interest despite being offered a favorable trade deal.

On Monday, Treasury Secretary Scott Bessent declined to forecast the Fed's September decision, but during a CNBC interview he outlined a case for why leaving rates unchanged might be the more prudent course.

"It is my belief that we've seen a supply shock. And traditionally, you don't raise interest rates into a supply shock unless you see second or third order effects, and we are seeing the core inflation has remained very, very restrained," Bessent said. He added that a productivity boom is likely to emerge on the other side of the artificial intelligence buildout, a factor that would tend to ease price pressures further rather than add to them.

Bessent's comments followed Fed Chair Kevin Warsh's first Jackson Hole speech on Friday, which saw September hike odds on the FedWatch tool move to near 60% from about 66% before. The dollar slipped after Bessent's interview, with his supply shock comment cited as a possible driver, though the hike probability was little changed on the day. Bessent and Warsh flew together to the G20, a detail Bessent dismissed by saying they talked about tennis, but the timing has sparked speculation that his remarks were intended to give Warsh room to postpone tightening. Any such intention would still need to pass a committee vote, and several Fed officials have continued to express support for a hike, making the September outcome genuinely uncertain.

Bessent's interview covered many topics beyond rates. He said he expects oil prices to decline, and repeated that the administration believes Iran is not yet ready to negotiate, framing an unspecified operation as a tool that would eventually push Tehran toward a deal. Regarding bonds, he called the US market the most resilient in the world, arguing that if there were genuine doubts about US debt, investors would sell Treasuries and buy other assets rather than hold, and noted the 10-year yield is near where it was when the President took office. He stated he does not think he can influence the market's equilibrium bond price. On currencies, Bessent said he believes Japanese authorities prefer a stronger yen and that the market is already pricing that in. He also discussed trade with Canada, saying the two countries are not in a trade war and that Canada received better terms than any other country, while adding that he does not believe Prime Minister Carney is acting in the best interests of Canadians. He separately mentioned a productive meeting with the head of the People's Bank of China the previous night, but gave no specifics on the discussion.