Scott Bessent has a fascinating task ahead of him. The new US Treasury secretary must shepherd a package of policies that spurs growth without allowing a return to inflation, and do this even though two keystone Trump 2.0 policies — reducing immigration and levying tariffs — tend to raise prices. His talk with Bloomberg’s Saleha Mohsin, found here, on how he intends to square the circle is worth 18 minutes of your time.
As covered yesterday, Bessent wants to reduce 10-year bond yields, which is hard without financial repression, central bank intervention, or low growth. Already, the Treasury’s first quarterly funding announcement under his watch surprisingly maintained Janet Yellen’s emphasis on issuing shorter-dated bonds, which many complained was distorting the market. “This explains why yesterday’s refunding announcement did not shift Treasury borrowing to longer maturities, as many had expected,” said Steve Sosnick of Interactive Brokers. “It is tough to expect lower long rates while simultaneously increasing supply.” Bessent’s key points to Saleha, as I saw them, were as follows:
Oil: During the campaign, “drill, baby, drill” was presented rather tenuously as a means to bring down inflation. The oil price has a big effect on 10-year inflation expectations, in what has been a durable anomaly — logically, if oil fluctuates and it’s a high price today, the odds increase that it will be cheaper in future and so inflation will fall, but that’s not how the bond market reacts to it. That means that getting oil prices down can theoretically help to bring down the allowance the bond markets make for inflation, and hence bring down yields:
But it’s unclear that this relationship, a quirk of the way traders in TIPS use energy futures as a hedge, can reduce the real weight of borrowing costs on the economy. Real yields suggest that cheaper oil doesn’t directly feed through. That’s logical as cheaper oil should theoretically act like a tax cut, and spur greater spending on everything else — which would be inflationary, and prompt yields to rise:
Another important question: What difference does it make? The oil price is far less important to a far less energy-intense US economy than it used to be — the cost of energy makes up a much smaller share of overall production costs, even at times when prices are high. The share of energy in gross domestic product, graphed here by Absolute Strategy Research, makes the point:
The oil price could double from here and still not inflict anything like the pain wrought in the late 1970s. Still, Absolute Strategy’s Ian Harnett points out that reducing energy prices — particularly as AI may be making the economy more energy-intense again — is “the only way to incentivize the private sector and relevering.” Pushing down the price won’t be easy. Trump’s intention to refill the Strategic Petroleum Reserve, depleted as the Biden administration battled inflation, will increase demand. And Jean Ergas of Tigress Financial Partners points out that OPEC won’t simply stand by as prices drop.
Article in Full: Bessent’s Goals Won’t Work Unless DOGE Does, Too: John Authers
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