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Written by: Tim Pierotti
“The President wants lower rates,” Bessent said in an interview with Fox Business. “He and I are focused on the 10-year Treasury and what is the yield of that.”
We have been making the case for more than a year now that the unprecedented fiscal support in the economy, the easy financial conditions, the secularly tight labor market and the generational transfer of massive, accumulated wealth would drive the economy and risk assets higher until inflation and interest rates get in the way.
Shrewdly, but perhaps dangerously, our new Treasury Secretary signaled to markets that he and the President will do what is necessary to contain the potential cycle-killing risk that higher inflation will push the ten-year and thereby mortgage rates higher. No, he didn’t say that if mortgage rates start to kill housing, we will shrink long-term issuance or pressure the Fed into a quantitative easing program and start buying treasuries. But in my view, that is what the above quote implies.
Bessent has a beyond impressive Wall Street resume having worked with luminaries like Soros and Druckenmiller and he has amassed a net worth of several hundred million dollars. Like it or not, that profile commands respect among market participants. Just like the market response to his nomination, which was unambiguously bullish, his words and his views will meaningfully impact markets. But Bessent is not independent, nor is he supposed to be in fairness. Unlike the Fed chair, the Treasury Secretary is a political appointee. That lack of independence has become immediately clear as he has contradicted previous commentary on the critical issues of tariffs and the duration of bond issuance.
On tariffs, it was all the way back in 2024 that Scott Bessent wrote, “Tariffs are inflationary and would strengthen the dollar, hardly a good starting point for a US industrial renaissance”. However, this week, when asked about the inflationary risk of tariffs, Bessent smiled and scoffed that he had “no idea” where the notion that tariffs are inflationary came from. He offers the uninspiring and misleading argument that tariffs can’t be inflationary because, unless additional capacity to spend is added, they weaken the consumers ability to buy other things. This of course ignores consumers’ will to save less or incur leverage. Also, if taken at face value, tariffs aren’t inflationary because they destroy demand elsewhere in the economy. Is that good? Is that what we want to see?
Bessent, prior to taking on his current role, like many, had been sharply critical of Janet Yellen, his predecessor at Treasury for concentrating an unusual percentage of bond issuance at the front end of the curve, thereby reducing supply of longer-term treasuries and flattening the yield curve. Frankly I agree with that criticism, but the issue is that Bessent, now with the opportunity to control the duration of issuance, has signaled to the market that he will basically pursue the exact same strategy as Yellen.
Bessent’s pitches a plan he describes as “3,3,3”. 3% real GDP growth, 3% deficits as a percentage of GDP (less than half of current run-rate) and 3 million more barrels a day of US oil production, from a current record rate of over 13mm barrels per day to over 16mm barrels. 3% GDP is doable given that’s the current trend growth rate but achieving that with far less fiscal support will be difficult. It is a great objective, but one that few see as realistic. The last part is the part where I
frankly question his sincerity. He knows and every energy analyst on Wall Street knows that neither the US majors nor OPEC are going to do anything that isn’t in their economic interest. Pushing down the price of oil isn’t their economic interest. When I asked Pete McNally of Third Bridge, a revered veteran oil analyst this week about the potential for this administration to beget higher production out of the Permian or Saudi/UAE he laughed and dismissed the idea out of hand.
Bessent is clearly smart, but he is also an intellectually pliable ideologue who serves at the pleasure of a highly ideological and unconventional President. As I said, I think jawboning the ten-year is a shrewd move that will potentially ease financial conditions amid inflationary pressures, but the potentially dangerous part is the risk that we lose fleeting fiscal credibility by responding to inflation with inflationary policies and rhetoric that risks Fed independence.
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