Fed's rate reduction anticipated by the market: 'significant likelihood', according to Bessent

Scott Bessent, Treasury Secretary, recently appeared on Fox News' Special Report with Bret Baier, where he discussed the current state of the U.S. economy. Bessent stated that inflationary pressures have been relatively modest, but he believes the Federal Reserve may cut interest rates before the end of the year due to concerns about tariffs pushing inflation higher.

The July jobs report, as expected, painted a weaker picture than previously thought. The report showed that only 73,000 jobs were created last month, which is significantly below the 110,000 estimate of economists polled by LSEG. Moreover, the report included large downward revisions to May and June, cutting 258,000 jobs from the previously announced estimates for those months.

The weaker-than-expected July jobs report rekindled the market's hopes of a September rate cut. According to the CME FedWatch tool, the market is pricing in an 89.4% probability of a rate cut in September. The consumer price index (CPI) has risen from 2.3% in April to 2.7% in June, and the Fed's preferred inflation gauge, the personal consumption expenditures (PCE) index, has risen from 2.1% in April to 2.6% in June.

The Federal Reserve Chair Jerome Powell has said the central bank is well-positioned to respond to a deterioration of economic conditions. However, two Federal Reserve governors wanted to cut interest rates, but the Fed has held off due to stubborn inflation that has remained above its 2% longer-run target.

The market also sees a possibility of 75-basis-points or 50-basis-points of cuts by the Federal Reserve's December meeting. Scott Bessent criticized the Federal Reserve for their stance on tariffs, stating it was "somewhat a lack of logic."

It is important to note that tariffs are taxes on imports that are paid by the importer, who typically passes some or all of those higher costs on to consumers through higher prices. This could contribute to inflationary pressures, which is a concern for the Federal Reserve.

The Federal Reserve governor who has expressed a dissenting opinion on interest rate decisions in the last three decades is Christopher Waller. He advocated for lowering interest rates and was notable for dissenting against the Fed's decision to keep rates unchanged in July 2019.

In conclusion, the weaker-than-expected July jobs report and rising inflation have increased the likelihood of a Federal Reserve interest rate cut in the near future. The market is currently betting on a 25-basis-point rate cut by the Federal Reserve in mid-September, but there is also a possibility of larger cuts in December. The Federal Reserve's stance on tariffs and their impact on inflation will continue to be a key factor in their decision-making process.