Bessent backs Warsh's Fed, sees 3% growth as inflation cools

Treasury Secretary Scott Bessent threw his weight behind new Federal Reserve Chairman Kevin Warsh on Tuesday, forecasting 3% economic growth without reigniting inflation while signaling the dollar can remain strong even as rates decline.

"I am confident that the Fed chair will optimize the path for both inflation and economic growth," Bessent said at the Economic Club of New York, praising Warsh for removing the Fed's forward guidance — a move that gives the central bank greater flexibility on rate decisions.

Bessent said the U.S. can achieve 3% or higher growth this year without the traditional inflation trade-off, echoing the 1990s expansion. The comments come as May consumer price index rose 4.2% from a year earlier, accelerating from 3.8% in April, while core personal consumption expenditures held at 3.3% in April. The Fed has held its benchmark rate at 5.25% to 5.5% since late 2025, and swaps markets now price a 36% probability of a quarter-point hike at the July 28-29 meeting.

Bessent's endorsement carries weight because the Treasury has increasingly shaped financial conditions through its debt issuance strategy, effectively substituting for traditional monetary policy. If inflation fails to retreat as the Iran conflict subsides — a scenario Bessent cited as a disinflationary catalyst — the Fed may face pressure to resume tightening, testing the Treasury secretary's confidence in Warsh's leadership.

Bessent dismissed the predictive value of the Fed's dot plot — the individual rate projections from 19 officials — saying he has traded against them in the past and that "no one should make Fed dot plot predictions." The June 2026 dot plot showed nearly half of officials projecting a possible rate hike within the year, a hawkish tilt that contrasts with Bessent's growth optimism.

The dollar index climbed to a 13-month high Tuesday, supported by the Treasury secretary's comments and a broad risk-off move in equities. "We are keen to take action to keep the dollar strong," Bessent said, adding that the currency can remain resilient even during a rate-cutting cycle.

The Treasury's Shadow Policy Role

Bessent's confidence in Warsh comes as the Treasury itself has become a major force in shaping long-term interest rates. By prioritizing short-term Treasury bills over long-term bonds, the Treasury has suppressed 10-year yields by an estimated 25 basis points, according to research by Stephen Miran, chair of the White House Council of Economic Advisers. That is equivalent to roughly one full percentage point of Fed rate cuts — a de facto easing delivered not by the central bank but by the government's debt management arm.

The strategy carries risks. With net interest payments exceeding $970 billion in fiscal 2025 — surpassing defense spending — the U.S. faces a $1 trillion interest bill in fiscal 2026. The Treasury's reliance on short-term rollover financing creates a refinancing wall of $8 trillion to $10 trillion in maturing debt this year, leaving the government exposed to higher rates if market conditions deteriorate.

Can the 1990s Repeat?

Bessent said the U.S. is "likely to replicate the 1990s sustained expansion" — a period of strong growth, low inflation, and rising productivity driven by technology investment. He argued that high GDP growth can coexist with subdued inflation, a view that diverges from the traditional Phillips curve relationship. Real wage growth, he said, will return to its pre-April pace as the economy accelerates.

Yet the inflation data tells a more complicated story. May's CPI acceleration to 4.2% from 3.8% in April suggests price pressures remain sticky, and the Fed's June dot plot reflects growing concern that the disinflation process has stalled. Bessent acknowledged that in February he had expected inflation to approach 2% by mid-summer — a forecast that has not materialized.

This article is for informational purposes only and does not constitute investment advice.