Bessent is asking the Fed to look past an oil shock his own department is deepening
Treasury Secretary Scott Bessent wants the Federal Reserve to see this year's inflation through the lens of an AI productivity boom. His own campaign to cut off Iran's oil exports to China is tightening the same market his disinflation case needs to loosen. The desk expects Chair Kevin Warsh to hold at 3.75-4.00% on October 28 and the 10-year yield to stay above 5%.
The Federal Reserve raised interest rates two weeks ago, in Kevin Warsh's first policy move as chair, and on Sunday morning Treasury Secretary Scott Bessent went on Fox to ask it to keep an "open mind" about what comes next, in remarks Bloomberg reported. His case rests on the idea that AI-driven productivity and deregulation are already doing disinflation's work. The trouble is that his own agency is working against that story. The same week Bessent made his pitch, he was also taking credit for cutting off Iran's remaining oil exports to China, a policy that tightens the very market driving the inflation he wants Warsh to look past.
The Fed's decision on September 16 was unanimous and hawkish. The Federal Open Market Committee raised its benchmark rate a quarter point to 3.75-4.00%, the first hike since July 2023, on a unanimous 12-0 vote, and its statement came with a dot plot signaling another increase before the year is out. Warsh was blunt at his press conference: "Inflation is too high and has been for too long."
Days before that meeting, the Bureau of Labor Statistics reported August headline inflation running at 3.4% year over year, against a core rate, which strips out food and energy, of 2.4%. The gap between those two figures is close to entirely energy: diesel and gasoline prices, pushed up by the Iran war and by Ukrainian strikes on Russian refineries, are sitting at records this year. The August CPI release shows the split plainly, a headline number moved by an oil shock and a core number that has stayed calm.
There is a Fed-independence subtext too. Warsh is Trump's pick, and a unanimous hike was his first answer to the question of whose clock he runs on. Bessent's pitch, eleven days later and five weeks before the midterms, puts that question to him again in public.
Bessent's case is that this is a productivity story. On Fox he said Warsh is "well aware" of AI productivity gains "similar to, if not more substantial than" the boom Alan Greenspan presided over in the 1990s, when Greenspan told the Fed to "let things run" instead of choking off growth with higher rates. The data available so far do not support that comparison. The Bureau of Labor Statistics' latest productivity report, covering the second quarter, showed output per hour rising 1.4% on an annualized basis and 2.2% over the year, well below the roughly 3% pace productivity ran through the late-1990s boom Bessent is invoking.
The same week, Bessent was taking a victory lap on the other half of his job: strangling Iran's remaining oil trade. On the same Fox appearance he said China has "substantially reduced any assistance to Iran" and that only 15 million barrels of Iranian oil remain on the water, headed for what he called Iran's "final delivery" to China within two weeks, after which Tehran will have nothing left to sell there. On Saturday he boasted on X that Türkiye and Oman had halted Mahan Air flights, the UAE had stopped all Iranian airlines, and the UAE central bank had blocked transactions by Bank Melli's branches, a campaign he has called an "economic D-Day," as Asharq Al-Awsat reported.
China still needs the oil. Losing its remaining Iranian barrels means its refiners buy from Saudi Arabia, Russia or elsewhere instead, adding demand to a market where Brent already trades above $104 a barrel because of the same war. Bessent is asking the Federal Reserve to treat this year's oil price as background noise while the rest of his own department works to make Iranian barrels scarcer and that noise louder.
The bond market is not behaving like it believes the noise argument. The 10-year Treasury yield closed at 5.17% on Friday and the 2-year at 4.81%, the pricing of a Fed expected to hold rates high long enough to keep an energy shock out of wage and price expectations. A market convinced this was a temporary spike, soon offset by an AI productivity wave, would be paying less to hold long-dated government debt.
The strongest case against this reading is that core inflation really has stayed calm. Core CPI has held near 2.4% for months, wage growth is running at 3.1% year over year, below the 3.4% headline rate, and the labor share of national income sits at a series low, meaning whatever productivity gains exist are flowing to profits more than to paychecks. Each of those facts argues that energy prices have yet to spread into the kind of broader wage-price dynamic the Fed actually fears. It is the best argument Bessent has, and it argues for the Fed to pause. A pause is a long way from the cut an "open mind" is angling for.
The calendar reinforces the case for a hold. The Fed's next meeting runs October 27 and 28, a week before the midterm elections, and the next inflation report, covering September, lands October 14. A second hike that close to the vote would invite a political fight Warsh does not need, and a cut would contradict the statement he signed a month earlier. Holding lets him point to headline inflation at 3.4% and wait for the oil market to move first.
Higher-for-longer rates have an identifiable set of losers: long-duration growth stocks priced for profits years out, and the data-center operators whose AI buildout Bessent cites as evidence of a productivity boom, since a 10-year yield above 5% raises their borrowing costs at the exact moment they are taking on debt to build it. The same yields undercutting Bessent's growth story are the ones his own department's oil policy is helping to hold up. The desk expects the Fed to hold its rate at 3.75-4.00% on October 28, with no cut before the end of the year. The tell will be the September CPI report on October 14. If the gap between headline and core stays near a full percentage point, the productivity story stays a talking point, and the Fed keeps its eye on the oil price.