Treasury Secretary Scott Bessent said Thursday that financial markets are pricing in a high likelihood of the Federal Reserve cutting interest rates before the end of the year amid concerns about tariffs pushing inflation higher.
Bessent, during an appearance on Fox News’ “Special Report with Bret Baier,” said after the Fed held interest rates steady for its fifth straight meeting in late July citing concerns about tariff-induced inflation squeezing consumers was “somewhat a lack of logic” in how they viewed tariffs’ impact on the economy.
“On one side, they were saying we need to wait, risk management, we need to see if we are going to see inflation from the tariffs,” Bessent said. “Again, it would not have been inflation. A one-time price adjustment is just like, you know, does your driver’s license cost more this year? Then, on the other side, they lowered their economic projections for the year. So, traditionally when economic projections go down, the interest rates go down.”
“Now the market is pricing in substantial probability of rate cuts over the coming months, and I would expect that the Fed will be following the market,” Bessent said.
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The market is currently pricing in an 89.4% probability of a 25-basis-point rate cut by the Federal Reserve when it holds its next meeting in mid-September, according to the CME FedWatch tool.
It also sees rates being substantially lower than the current target range of 4.25% to 4.5% by the end of the year, with a 45.7% chance of 75-basis-points of cuts and a 42.6% chance of 50-basis-points from that level after the Fed’s December meeting.
Bessent also emphasized that price increases stemming from tariffs may just be a one-time price increase, saying that inflationary pressures have been relatively modest.
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“Thus far, we have not seen a transmission into prices, and if we do, it could be a one-time price adjustment. But what we are seeing thus far is the manufacturers are eating it,” Bessent said. “The overseas companies just taking advantage of the U.S. for so long, that the U.S. companies are shouldering a lot of the tariffs, and you know, perhaps, we’ll see some price down to consumers.”
“Overall, inflation has been very – you know, has been very nascent, and as a matter of fact, two months ago, we saw inflation drop for the first time in four years,” he said.
The Fed has held off of rate cuts because stubborn inflation has remained above its 2% longer-run target, while the labor market has been in solid shape with a 4.2% unemployment rate.
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While inflation is well below the 40-year highs reached in 2022, it has ticked further away from the 2% goal in recent months since its last decline in April.
The consumer price index (CPI) has risen from 2.3% in April to 2.7% in June, while the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, has risen from 2.1% in April to 2.6% in June.
Those inflation trends had diminished the outlook for rate cuts until they saw a resurgence after a weaker-than-expected July jobs report released on Friday, which found just 73,000 jobs created last month – well below the 110,000 estimate of economists polled by LSEG.
The report also included large downward revisions to May and June, cutting 258,000 jobs from the previously announced estimates for those months. It showed the labor market as being weaker than previously thought, which in turn rekindled the market’s hopes of a September rate cut.
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