Bessent Calls on the Fed: AI and Deregulation Can Curb Inflation, Rate Approach Should Be Open

U.S. Treasury Secretary Scott Bessent said Federal Reserve policymakers should keep an "open mind" on interest rates, adding that productivity gains from artificial intelligence (AI) and deregulation will help curb U.S. inflation. Bessent made the remarks while discussing the U.S. economy. He said that under Trump, the U.S. economy is booming, partly thanks to tax cuts and deregulation, even though fuel prices pushed higher by the conflict with Iran are weighing on American voters ahead of the November midterm elections. Speaking on a program, Bessent said Trump's pick to lead the Fed, Kevin Warsh, is "very aware" that the U.S. economy is currently experiencing growth "on par with, or even more pronounced than" the internet boom of the 1990s, when Alan Greenspan served as Fed chair. Bessent said that at the time, Greenspan chose to "let the economy run," and that "the Board of Governors and the voting members of the Fed should keep an open mind, because this also involves the deregulation factor." For investors, Bessent's remarks highlight the core of the debate over the rate outlook. If AI and deregulation are boosting the economy's productive capacity, the Fed may have more room to tolerate strong growth without responding with aggressive rate hikes. That could benefit stocks and other risk assets. But persistently high energy prices could keep inflation elevated, in turn pushing up U.S. Treasury yields and keeping rate-sensitive sectors under pressure. So far this year, inflation has been driven by record-high diesel and gasoline prices linked to the war with Iran and Ukrainian attacks on Russia's energy industry, with effects rippling through the U.S. economy and pushing up global bond yields. According to government data released on September 11, U.S. consumer prices excluding food and energy rose 0.3% month over month in August and 2.4% year over year. Days later, the Fed under Warsh raised its benchmark rate for the first time since 2023. Still, Bessent argued that "core inflation has been very flat, actually coming down over the past few months."