U.S. Treasury Secretary Scott Bessent. Photo: U.S. Department of the Treasury, public domain.
Treasury Secretary Scott Bessent publicly urged the Federal Reserve on Friday not to raise interest rates in response to an "energy supply shock" tied to the war with Iran — and within hours, a senior Fed official pushed back, saying inflation has spread far beyond energy prices.
"I think the Fed should understand that this is an energy supply shock," Bessent said in an interview on CNBC on Friday, adding that the underlying U.S. economy is very strong. He said the central bank should have an open mind and not hike rates because of inflation driven by the disruption to energy supplies from the conflict.
Shortly afterwards, Chicago Fed President Austan Goolsbee appeared on the same network and contradicted him. Goolsbee said price pressures were building far beyond what could be explained by high oil prices, having spread to the services sector and areas such as medical care that are not usually responsive to the price of oil. He added that inflation was also elevated through strong demand tied to the AI data center buildout.
Bessent's case: look through the energy shock
Bessent's argument is that a jump in oil prices caused by war is a one-off supply shock, not a sign of an overheating economy, and that raising rates in response would punish households and businesses for a disruption the Fed cannot control. The argument echoes the case the Trump administration has made for months: that the economy is strong underneath, and that monetary policy should not tighten further while a war is distorting energy markets.
Oil prices have been volatile through the conflict. Brent crude, which peaked far higher earlier in the war, has fallen about 18 percent from its recent peak, and the average price of a gallon of gasoline in the United States is $3.87, down from $4.34 a month ago — though still well above the $2.98 recorded on February 28, before the war began. Trump has said he is "highly unlikely" to resume strikes on Iran while negotiations proceed, and his administration is maintaining a blockade on Iranian oil shipments and trade sanctions instead.
Goolsbee's rebuttal: inflation is broader than oil
Goolsbee's reply cut directly against that framing. "The tariff inflation and oil price shock were supposed to have gone away by now and it hasn't," he said, calling services inflation "one of the more troubling aspects" of the recent inflation reports. While not committing himself to a rate hike, he said the Fed "has definitely got work to do to continue to reestablish its credibility."
Other Fed officials have sounded similarly hawkish in recent days. New York Fed President John Williams said on Thursday that more interest rate increases are likely, Dallas Fed President Lorie Logan laid out the case on Tuesday for raising rates by a quarter percentage point at least two more times, perhaps quickly, and Boston Fed President Susan Collins said on Friday that tighter monetary policy is coming because of high inflation.
A December hike now looks likely
The clash comes days after data strengthened the case for a hike. The U.S. economy added 165,000 jobs in October, stronger than expected, and the October consumer price report released on Tuesday showed prices rising 0.4 percent for the month, the third consecutive monthly gain of at least 0.4 percent. Core prices, which strip out volatile food and energy, rose 0.3 percent.
That core reading matters because Fed Governor Christopher Waller had said he would support a quarter-point increase at the Fed's December 8-9 meeting unless core inflation came in at 0.3 percent or more — and it did. Waller had also raised the possibility of a larger half-percentage-point move, and some officials have since discussed it. Traders are now fully pricing in a 25-basis-point hike in December, and financial markets also expect another increase in January. CME FedWatch puts the chance of a December hike at 89.4 percent.
The Fed left its policy rate on hold at 3.75 to 4 percent at its last meeting, with Fed Chair Kevin Warsh saying policymakers would watch the data before deciding whether more tightening was needed. The data since then — hot inflation, a strong jobs report and hawkish signals from across the Fed — has pointed in one direction. Bessent's public intervention is the administration's clearest attempt yet to push the other way, and Goolsbee's swift rebuttal shows how little appetite there is inside the central bank to look through the inflation numbers.
Sources: Reuters, Al Jazeera, Kitco News.