Treasury Secretary Scott Bessent says financial markets are increasingly convinced the Federal Reserve will pivot to rate cuts before year’s end an expectation that’s gained traction following a disappointing July jobs report and lingering questions about the real inflationary impact of tariffs.
Speaking Thursday on Fox News’ Special Report with Bret Baier, Bessent criticized the Fed’s decision in late July to keep interest rates unchanged for the fifth consecutive meeting. He argued that the central bank’s stated concerns over “tariff-induced inflation” don’t match the broader economic reality.
“They were saying they need to wait, see if tariffs bring inflation but that’s not sustained inflation,” Bessent said. “A one-time price adjustment is not the same as ongoing inflation. Meanwhile, they lowered economic growth projections. Traditionally, when growth forecasts go down, so do interest rates.”
According to Bessent, that disconnect has pushed markets to price in a “substantial probability” of rate cuts over the next several months, with investors anticipating the Fed will follow their lead.
Market Betting on a September Cut
Futures traders are now assigning an 89.4% probability that the Fed will deliver a 25-basis-point cut at its next policy meeting in mid-September, according to the CME FedWatch tool.
Looking further ahead, the market sees rates ending 2025 well below the current 4.25%–4.50% target range:
- 45.7% chance of 75 basis points in total cuts by December
- 42.6% chance of 50 basis points in cuts by December
This marks a significant shift from earlier in the summer, when persistent inflation appeared to keep cuts off the table.
Tariffs: One-Time Bump, Not Persistent Inflation?
Bessent emphasized that while tariffs can raise prices on imported goods, they don’t necessarily create sustained inflationary pressure.
“We haven’t seen a broad pass-through to consumer prices. Manufacturers are absorbing a lot of the costs, and in some cases, overseas companies are taking the hit. We might see isolated price bumps, but not the kind of ongoing inflation that should keep rates elevated,” he said.
Tariffs, he noted, are essentially a tax on imports costs that importers may pass on to consumers or absorb themselves. In the current environment, Bessent says, many U.S. firms are shouldering the expense rather than risking a drop in demand.
Economic Backdrop
The Fed’s reluctance to cut rates has been rooted in two key factors:
- Inflation: Still running above the Fed’s 2% target, though far below the 2022 peak. The Consumer Price Index rose from 2.3% in April to 2.7% in June; the Fed’s preferred Personal Consumption Expenditures index climbed from 2.1% to 2.6% over the same period.
- Labor Market: Until recently, employment trends looked steady, with a 4.2% unemployment rate suggesting resilience.
But the latest jobs report, released Friday, changed that narrative. Employers added just 73,000 jobs in July, well short of the 110,000 forecast. Even more concerning, the Labor Department revised May and June payroll numbers sharply downward erasing 258,000 jobs from previous estimates.
That combination of weak hiring and downward revisions has heightened fears that the labor market’s strength is fading, giving the Fed more room to shift policy toward supporting growth.
Powell’s Position
Fed Chair Jerome Powell has maintained that the central bank is prepared to act quickly if economic conditions deteriorate. Thursday’s market reaction and Bessent’s public remarks suggest that investors believe the moment for action could come as soon as September.
For now, the Fed’s balancing act continues: weighing modestly higher inflation readings against clear signs of slowing employment. If the data trend continues, Bessent’s prediction of a near-term rate cut could become reality marking a notable shift in U.S. monetary policy after more than a year of restraint.
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