Timiraos: Bessent's Policy Reaction Function Turns Less Dovish, Points to Holding Rates

BlockBeats, Aug. 5 — Nick Timiraos, often dubbed the Fed's "whisperer," wrote that U.S. Treasury Secretary Bessent's policy reaction function has shifted in a less dovish direction. Timiraos said Bessent's comments this year imply the Federal Reserve should keep interest rates at current levels. Earlier this year, Bessent cited model-based estimates suggesting the policy rate could be above the neutral rate by more than 25 basis points and potentially by over 100 basis points. On Aug. 4, Bessent offered two messages. He first defended Wash's decision last week not to spell out a policy reaction function, saying each meeting should remain open and markets should draw their own conclusions, while Wash preserves flexibility to pursue the best outcome. He also laid out what could be interpreted as a dovish set of reaction functions by arguing that recent shocks should be looked through. Raising the question of what rising short-term rates would actually do, he said it would take time to see the effects, while stressing that underlying inflation has been "very mild" and "very stable." He added that once volatile components heavily influenced by energy are stripped out, core inflation has remained steady and he expects that to continue.