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U.S. Treasury Secretary Scott Bessent on Wednesday disavowed his previous warnings about tariffs, telling Congress he was mistaken to claim they would fuel inflation. The statement marks a significant reversal from advice he gave investors at his firm, Key Square, in January 2024, before Donald Trump’s successful presidential campaign.

During a tense House Financial Services Committee hearing, Bessent directly addressed his past analysis. "If I was mistaken, I want to correct it," he stated. "And I was also mistaken when I said the tariffs could be inflationary."

The "Dog That Didn't Bark"

Bessent, a Trump appointee, argued that the U.S. economy’s performance since the president returned to office in January 2025 has invalidated concerns over tariff-driven price hikes. He pointed to economic growth and cooling inflation as evidence.

"So tariff inflation was the dog that didn't bark," Bessent told lawmakers.

This view contrasts with recent economic data and commentary from the Federal Reserve. Last month’s Producer Price Index showed a larger-than-expected rise in December, and Fed Chair Jerome Powell recently noted that companies passing tariff costs on to consumers were keeping inflation at elevated levels.

Tense Exchange Defines Congressional Hearing

Democrats on the committee used the hearing, which was focused on the Financial Stability Oversight Council’s annual report, to challenge Bessent on the administration's trade policy.

Representative Maxine Waters, the committee's senior Democrat, led the questioning, referencing the same Key Square investor letter that predicted tariff inflation would strengthen the dollar. She demanded a "yes" or "no" answer on whether tariffs cause inflation.

Bessent cited data from the San Francisco Federal Reserve to argue they do not. Waters countered, claiming that prices for coffee and bananas rose after tariffs were imposed on producer countries. She added that tariffs on steel, lumber, and appliances were increasing costs for homebuilders and contributing to housing inflation.

The exchange escalated when Bessent attributed rising housing costs to a surge of immigrants. Waters repeatedly cut him off, stating, "Reclaiming my time," before asking Committee Chairman French Hill, "Can you shut him up?"

Bessent's full admission that his earlier inflation warning was wrong came later in the hearing, during questioning by Democrat Sean Casten.

Questions Mount Over Federal Reserve Independence

The hearing also explored the administration’s views on the independence of the Federal Reserve. Democrats pressed Bessent on whether he believed President Trump has the constitutional authority to fire the Fed chair or board members over policy disagreements.

Bessent stated he considers the central bank an independent agency but said he had no opinion on the president’s firing authority.

He acknowledged that "varying opinions" exist within the administration regarding the "unitary executive" theory, a legal doctrine that grants the president vast executive power. Bessent, who is not a lawyer, said the matter would ultimately be decided by the U.S. Supreme Court.

The Court heard arguments last month related to Trump's attempt last year to fire Fed Governor Lisa Cook, with a ruling anticipated by the end of June.

Source: Bloomberg

Source: Yahoo Finance

U.S. Treasury Secretary Scott Bessent affirmed his view of the Federal Reserve as an independent agency on Wednesday, even as a historic legal battle over presidential power puts the central bank's autonomy under a microscope.

Speaking before the House Financial Services Committee, Bessent avoided giving a legal opinion on whether a president can fire a Federal Reserve official over monetary policy disagreements. He noted the issue would ultimately be decided by the Supreme Court.

Bessent acknowledged that there were "varying opinions" within the administration regarding the "unitary executive" theory—a legal doctrine that argues for expansive presidential authority over the federal government.

Supreme Court Scrutinizes Trump's Unprecedented Move

The debate is far from theoretical. The Supreme Court is currently reviewing President Donald Trump’s unprecedented attempt to oust Federal Reserve Governor Lisa Cook, a case that directly challenges the central bank's independence from political pressure.

Since the Federal Reserve was established in 1913, no president has ever tried to remove one of its officials. During arguments last month, Supreme Court justices from both conservative and liberal wings expressed unease with the administration's position, signaling concern for the potential fallout.

The core of the legal debate revolves around what qualifies as sufficient "cause" under federal law to remove a Fed official and what procedures are necessary to ensure a fair process for Cook. Justices appeared hesitant to approve the Trump administration's request to lift a lower court's order that prevents Cook from being fired while the case proceeds.

The "Unitary Executive" Theory Explained

President Trump's actions are rooted in an aggressive interpretation of the "unitary executive" theory. This doctrine advances a specific reading of Article II of the U.S. Constitution, which outlines presidential powers.

Key arguments of the theory include:

• The president possesses sole authority over the entire executive branch of the federal government.

• This power allows the president to remove any executive branch official.

• This authority holds even when Congress has passed laws to limit a president's ability to fire the heads of independent agencies.

This interpretation challenges the traditional American system of checks and balances, which divides power between the executive, legislative, and judicial branches.

Public Trust and the Fed's Credibility

When asked if he viewed the Fed as an executive or legislative agency, Bessent was direct: "I consider it an independent agency."

He stressed that the Federal Reserve's credibility is paramount. "I do believe that the Federal Reserve has to maintain credibility and be like Caesar's wife, beyond reproach," he stated.

In a separate exchange, Bessent linked the Fed's independence to public trust. He argued that the central bank had lost some of that trust by allowing inflation to rise unchecked, which he said "ravaged" the incomes of Americans.

A week of actions around rare earths

An overall focus on China

Source: Yahoo Finance

President Donald Trump has made it clear that any nominee to lead the Federal Reserve must be committed to lowering interest rates, stating he would have rejected potential candidate Kevin Warsh otherwise.

"If he came in and said, 'I want to raise it,' he would not have gotten the job, no," Trump said in an interview with NBC News on Wednesday.

The President's Case for Rate Cuts

Trump expressed confidence that the Fed would ultimately lower rates, arguing that "we're way high in interest" at a time when "we're a rich country again."

When asked if Warsh, a former Fed governor, understood the administration's desire for a lower benchmark rate, the president affirmed, "I think he does, but I think he wants to anyway."

Fed Independence in the Crosshairs

These remarks are expected to become a focal point during any future confirmation process, where the political independence of the Federal Reserve will be a central theme of debate.

The nomination already faces political roadblocks. Republican Senator Thom Tillis, a member of the Banking Committee, has vowed to block Trump's nominees to the central bank. His opposition will continue until the Justice Department concludes an investigation into a renovation at the institution.

Current Fed Chair Jerome Powell has characterized the probe as a thinly veiled attack on the central bank's authority to set monetary policy without political interference. While Trump administration officials deny this, the president has maintained a public pressure campaign on Powell for months to ease policy.

The Candidate: Kevin Warsh's Evolving Stance

Kevin Warsh, who previously served as a Federal Reserve governor, historically held a reputation as an inflation hawk. However, his recent commentary has shifted, showing more support for the idea of lower interest rates.