US Treasury Secretary Bessent Defends Fed Rate Cut Comments, Citing Model Suggestion

Bessent Clarifies Stance on Interest Rate Cuts

US Treasury Secretary Scott Bessent defended his remarks regarding Federal Reserve interest rate decisions, stating he wasn't calling for a series of cuts but merely pointing out that models suggest the "neutral rate" should be about 1.5 percentage points lower than current levels.

"I didn't tell the Fed what to do," Bessent said in an interview with Fox Business Network on Thursday. This followed a day after his public statements that the current interest rate level was "too restrictive," believing the benchmark rate should be lowered by 150-175 basis points. He predicted in a Bloomberg Television interview that the Fed could begin a series of cuts in the coming months, possibly starting with a "compensatory" 50 basis point cut in September.

"What I said was, to get to a neutral rate, you'd need about 150 basis points of cuts," Bessent clarified.

What is the Neutral Rate?
The "neutral rate" refers to the interest rate level that neither stimulates nor inhibits the economy. Fed Chairman Jerome Powell stated on July 30 that "there are a range of views on what the neutral rate is for the current economy," estimating himself that the current policy is in a "modestly restrictive" state.

Bessent added, "I think that if you acknowledge that there is a neutral rate out there, there is room for a series of cuts. But I didn't call for it, never have. All I said was the model shows the neutral rate is about 150 basis points lower."

Criticism of Bessent's Comments

Bessent's comments have drawn criticism for directly pressuring the Fed to cut rates, raising questions about the appropriateness of Treasury Department intervention in the central bank's independent decisions.

Julia Coronado, founder of research firm MacroPolicy Perspectives and a former Fed economist, said, "The Treasury Secretary shouldn't be commenting on the neutral rate. For the highest economic official in this administration to be saying this is a direct, public pressure on the Fed to do his bidding."

Jim Bianco, president of Bianco Research, also questioned Bessent's latest explanation, saying, "I don't know what model he's talking about. As far as the Fed's benchmark rate, I don't know of any model that thinks it should be that much lower."

Market Expectations

As of Thursday morning, interest rate futures showed that the market is betting that the Fed will cut rates by less than 150 basis points cumulatively by the end of next year. Meanwhile, confidence in a 25 basis point rate cut at the September meeting has declined slightly. This shift is attributed to the largest monthly increase in the US Producer Price Index (PPI) in three years.

St. Louis Fed President Alberto Musalem expressed concerns about inflation after the release of the PPI data, stating that a 50 basis point cut is not consistent with the current economic conditions or data. He said that inflation appears to be close to 3%. As more data emerges, views will be further revised, and it is too early to say what the correct decision is in September.