Attitude Reversal! Bessent expresses support for the Fed to "stand pat" for two consecutive days, war clouds dampen rate cut expectations

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Against the backdrop of the Iran war driving up energy prices and reigniting inflationary pressures, Bessant publicly stated twice within two days that he understands the Federal Reserve’s position of choosing to wait for more data before taking action.

In an interview with CNBC on Wednesday, Bessant said, "If they need to delay rate cuts, I understand." The previous day, he also told the media at a press roundtable, "If they want to wait for some clear signals, I understand."

This is in stark contrast to Bessant’s public stance over the past year. Previously, he had repeatedly stated his view that current conditions support the Fed lowering borrowing costs. This turnaround directly brings the Treasury’s stance closer to the Fed’s more cautious members.

Bessant also added that once energy costs fall back, the Fed would "be able to take more actions" to advance rate cuts. This statement suggests that he characterizes the delay in rate cuts as temporary, rather than a fundamental change in policy direction.

The Iran War and Inflation Data Provide Concrete Reasons to Stand Pat

The direct backdrop to Bessant’s shift in stance is the surge in energy prices triggered by the Iran war.

US CPI data released last week for March showed the largest month-on-month increase in headline inflation since 2022. Although core CPI has yet to raise clear warnings, another key monthly price indicator, the PCE, has recently continued to show price pressures, further supporting the argument for monetary policy patience.

Bessant also noted on Wednesday that gasoline prices may take some time to fall back. This means that, even though oil prices have retreated somewhat from recent highs, they remain far above February levels, offering limited restraining effect on inflation in the short term.

Walsh to Take Office Soon; First Vote Faces Political Sensitivity

Bessant’s remarks also closely overlap with the timeline of the Fed leadership’s handover. If Walsh completes the confirmation process before the Fed’s June policy meeting, he will face a difficult situation: whether a majority of FOMC members will be ready to support resuming rate cuts remains uncertain.

If the FOMC majority is not yet ready to support rate cuts, Walsh will face a dilemma: Should he respond to Trump’s long-standing push for lower rates and advocate for cuts—only to be outvoted? Or should he opt to stand pat? The former would be an extremely rare scenario in which the Fed chair’s proposal is rejected by the majority in decades.

Historically, Paul Volcker was outvoted in 1986, by which time he had been leading the Fed for nearly seven years and his dissent was against a rate cut. For Walsh, being rejected in his very first vote upon taking office would immediately trigger doubts about his influence within the institution.

Bessant told the media on Tuesday that Walsh can "lead the next cycle for the Fed." This wording has been interpreted externally as the Trump administration potentially giving Walsh some room, waiting for data conditions to mature before pushing for FOMC rate-cut consensus. However, Bessant did not elaborate explicitly on this.

Walsh himself will have the opportunity to clarify his stance on a potential rate cut timetable at the Senate Banking Committee confirmation hearing on April 21.

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