Bessent Calls for Big Rate Cuts. Futures Markets Aren’t Buying It.

Treasury Secretary Scott Bessent wants Federal Reserve officials to lower interest rates by half a percentage point. Photo: Al Drago/Getty Images

After inflation failed to spike in July, Treasury Secretary Scott Bessent is calling for Federal Reserve officials to lower interest rates by half a percentage point at the upcoming September policy meeting. Futures markets remain skeptical—and for good reason.

“I think we could go into a series of rate cuts here, starting with a 50-basis-point rate cut in September,” Bessent said in a television interview on Bloomberg on Wednesday. (A basis point is a hundredth of a percentage point.) “If you look at any model” it suggests that “we should probably be 150, 175 basis points lower.”

In light of Bessent’s comments, the odds of a 50-basis-point cut in September are rising, albeit by a small margin. Louis Navellier, chairman and founder of Navellier & Associates, agreed with Bessent’s sentiments, noting that the only “danger of a 50-basis-point cut is that the Fed does not want to look like it is panicking.”

But while the odds of a quarter percentage point cut at the September Federal Open Market Committee meeting are essentially locked in, bets on a bigger rate remain elusive. There’s now a 0.1% probability that the Fed cuts by 50 basis points next month, according to CME’s FedWatch tool. Bloomberg has the odds a bit higher, but still only 1.4%.

For once, futures markets are actually proceeding with caution—and their stance is likely merited. The debate about the path ahead for rate policy hinges on the balance between the Fed’s dual mandates of maintaining price stability and maximum employment. The majority of the committee, including Fed Chair Jerome Powell, have indicated that they continue to see labor conditions as broadly balanced, even as inflation has not returned to the Fed’s 2% target.

This means that much of the calculus for whether the FOMC will cut rates, and by how much, will hinge on the August employment data due out on Sept. 5. If the data reveal that labor conditions continued to substantially deteriorate this month, economists believe that Fed officials will jump into action, but still likely only cutting by 25 basis points.

Unless the August jobs report is “really bad,” PNC Chief Economist Gus Faucher doesn’t see a 50-basis-point cut happening. And a bad report would likely need to include outright job losses in August, plus either June or July job growth revised down to show a decline, and unemployment rising from the current rate of 4.2% to 4.4%.

The latest measure of the consumer price index was 2.7% year over year —broadly in line with expectations and a steady pace that calmed fears that prices would surge amid higher tariffs. Trump administration officials like Bessent are using that, paired with the substantially weaker payroll growth in recent months, to argue conditions merit bigger rate cuts to stimulate economic growth and keep the labor market from collapsing.

But the underlying inflation data show core CPI firmed more than expected, climbing at an annual rate of 3.1% in July. Perhaps more concerning, the supercore CPI (which excludes housing, energy and food costs) posted its second-largest advance in almost 18 months, surging by 0.5%.

“When we look under the hood of the core goods data, the gains were actually more widespread than in June and the tariff pass-through in recent months is evident in the bulk of core goods items,” writes Omair Sharif, founder and president of the research shop Inflation Insights.

In the summary of economic projections issued in June, Fed officials projected core inflation, as measured by the Personal Consumption Expenditures Price Index, would finish the year at 3.1%. But core CPI is already hitting that mark—and tariff effects are still just creeping into prices due to ongoing fluctuations in trade policies.

That will likely give Fed policymakers some pause, even with slowing job growth. Employers added just 73,000 positions in July and the Bureau of Labor Statistics revised down May payroll gains to just 19,000 and June to 14,000. But unemployment remained at 4.2%.

“The Fed is still concerned about inflation, particularly with core inflation picking up in July and set to accelerate more over the next few months because of tariffs,” Faucher tells Barron’s. The labor market isn’t as strong as we thought it was a couple of weeks ago, but it’s still in “OK shape” he adds. Even after the revisions, the outlook for near-term inflation is trending higher, so the FOMC will be reluctant to cut more than 25 basis points.

“Essentially, the question of cutting short-term rates in September (or not) comes down to how [officials] view the potential damage done to the Committee’s credibility by tolerating above-target inflation for too long,” writes Steven Ricchiuto, U.S. chief economist, Mizuho Securities USA.

While Governors Michelle Bowman and Christopher Waller have dovishly advocated for a quarter-percentage point cut, Ricchiuto believes the rest of the committee still skews more hawkish given that inflation has run above the Fed’s 2% target for 53 straight months.

Richmond Fed President Tom Barkin didn’t provide much signal that he’s shifting away from his more hawkish stance. “As the visibility continues to improve, we are well positioned to adjust our policy stance as needed,” Barkin said in speeches this week.

In fact, even if the softer July inflation data have provided Fed policymakers with some flexibility to cut rates in September, it is far from obvious that the Fed will quickly follow with another cut in October, writes Jon Hilsenrath, senior advisor at StoneX.

Futures markets are currently placing a 69% probability of another cut in the fed-funds rate in October, which would drop the target range to 3.75% to 4%.

“That looks ambitious,” Hilsenrath said. “If the Fed moves again, it likely will be in December and it will likely be twice this year, not three times.”

Write to Megan Leonhardt at megan.leonhardt@barrons.com