Rate Path: Treasury Chief Backs Potential Further Hikes

The administration faces a tension between its desire for cheap credit and its trust in the Federal Reserve's current leadership. Treasury Secretary Scott Bessent addressed this conflict on Wednesday, stating that additional interest rate hikes would not necessarily constitute a policy error.

He made the remarks in an interview with CNBC's Brian Sullivan. When asked if future increases would represent a mistake, Bessent replied, "That's not necessarily so." The comment landed just hours after the Fed announced it would hold rates steady at its October meeting. That pause followed a September hike, the first rate increase in three years.

Market traders currently expect the central bank to resume raising rates at its December meeting. Despite this trajectory, President Donald Trump has repeatedly urged the Fed to lower borrowing costs. He pressured Jerome Powell during his tenure and now watches Kevin Warsh, the current chairman. Bessent said he and the president believe Warsh is handling his role well. "I think Chair Warsh is off to a great start," Bessent said, adding that he has "great confidence in him."

Bessent suggested the Fed should remain flexible regarding the energy price shock caused by the U.S. war with Iran. The conflict has cut global crude production, pushing annual inflation above the Fed's 2% target. On the war itself, Bessent said Operation Economic Outcast, the effort to isolate Iran's economy, has been "very successful." He cited internal estimates that the Iranian economy could shrink by 25% over the next year.

The Treasury secretary also addressed concerns about debt tied to artificial intelligence. He said officials monitor the situation but see no need for alarm. He specifically mentioned neoclouds, firms providing cloud infrastructure for AI that have struggled recently. Tesla CEO Elon Musk warned on Sunday that more than 200 of these firms face "guppy-level death and consolidation." Bessent offered a more measured view. "I don't think it's problematic at all," he said. "The neoclouds are a small component of the overall ecosystem, and we're still seeing the financing getting done."

Looking ahead to economic data, Bessent expects the third-quarter GDP report, due Thursday, to show strong growth. He added a caveat, noting, "I haven't seen it yet."