Scott Bessent: Fixing the Fed, Tariffs for National Security, Solving Affordability in 2026

0:00Secretary Besant, welcome back to All In. We appreciate you taking the time to catch up with us and provide this first year in review. We're excited to have you here and hear how things are going and what's ahead regarding the fiscal condition of the U.S. government, the economic condition of the U.S. economy, including how things are going for Wall Street and Main Street. And finally, we'd like to broadly discuss some of the administration's policies, decisions, and how they're playing out or will play out from your point of view. I'll start us off and maybe to catch up on our last conversation.

0:35One of the things that I've cared deeply about and which you shared an objective around is getting the budget deficit below 3 % of GDP. I'd love to hear from your point of view how that's going and how things are looking for fiscal year 26, the actions that have been taken and what you think is ahead for that target. Good to be with you. Happy to review the year. talk about next year. There's a lot going on. I would categorize 2025. We had some important victories, some important policy announcements, some important movement. But as I've described it, 2025 was setting the table. And especially on the economy, I think the feast and the banquet is going to be in 2026.

1:20To start with the budget deficit, we didn't get much credit because it came out during the shutdown. The U.S. fiscal year is on September 30th. We had a slight fiscal contraction for the year. Wasn't much, but much better than the$2.0 trillion that was estimated. We came down from about$1.8 trillion to$1.78 trillion. So a contraction nonetheless. For the calendar year were making great progress. And just to put it in context, Biden administration, they blew things out trying to get Vice President Harris elected in the fourth quarter. So last year, 2024, 40 % of the government spending occurred in the fourth quarter as they had the

2:15unsuccessful attempt to convince voters that they weren't in a world of hurt. I forecast that we will have approximately a$200 billion to$300 billion fiscal contraction for the calendar year, which is between 0.71 % of GDP. We're going to end the year with nominal growth close to 6%. So we will be bringing down the deficit to GDP. I believe it peaked 6.8 % for the calendar year previous year, and we're going to be in the mid-fives. So it's a very good start on an important journey. And I've said that I would, by the time President Trump leaves office, that we would like to have something with a three in front of it, which will stabilize the deficit to GDP, which is an important number.

3:09and enable us to start paying down debt. Scott, it seems like the tariffs have had an enormously positive impact. It's given you a lot of tools in the toolbox to work with. Why do you think so many people got it wrong? A lot of people I'm sure that you've known and worked with in your prior life as a hedge fund manager, what did they get wrong? What did they miss that you were able to see? Well, a couple of things. I think people didn't have an open mind. They became the Trump tariffs, which immediately a large cohort of whether it was government officials, industry people, the general population, because President Trump wanted to do it, it must be bad.

3:55I said the other day, President Trump cured cancer, but it caused dandruff. Then people would say, well, you know, President Trump has caused a dandruff epidemic. And look, there's a lot of orthodoxy that hasn't worked. If we look back, early 2000s, letting China into the global trading system, that they would become more like us. And there was a point, and I'm somewhat sympathetic to the people who believe that, but by 2013, when Xi Jinping came in, and great writers like Elizabeth Economy, who had been of that view, reversed and said, he's a different kind of cat. It's no longer going to be Chinese policies with capitalist tendencies.

4:44It's just going to go back to hard communism, Leninism. And I just think that it was a failure of imagination. I've said several times people, and maybe we'll talk about it today, when people ask me, what are you looking for in a Fed chair? I said, it's someone with an open mind. If we go back to the 1990s, Alan Greenspan did a magnificent job because he had an open mind that the Internet office modernization boom was going to create a productivity bonanza for the U.S. economy. And he let the economy, he let it rip. And we had an incredible economy paid down a tremendous amount of debt that by 1998, 1999, with a combination of Clinton administration having gotten religion, Newt Gingrich and his policies, there was talk at the end of the 90s that there might not be enough government debt to meet the needs of the financials.

5:52system, which is the opposite of what we have now. So again, I would, part of it was just anything the president does must be wrong. Part of it was a failure of imagination. And there's some very good studies coming out now that are showing why everyone has been wrong. The measurement problems on the increase in goods prices. There's a study from not a friend of the administration, the San Francisco Fed, with 150 years of data, I would refer everyone to that, that shows that tariffs do not cause inflation, that they're actually disinflationary. So has anybody read that study? Scott, has that been, I would say, a part of the conversation in the administration now that there is this new revenue stream for the federal government, there's an opportunity to cut taxes and cut other sources of revenue for the federal government.

6:54And that could potentially accelerate the economy. But balancing that question against the importance of cutting the deficit, how do you think about the balance between using tariffs as a mechanism for reducing the tax burden on the economy versus using the tariffs as an incremental revenue source for the federal government to start to reduce the deficit and pay down the debt eventually. David, before I answer that, another thing I want to go back to is President Trump. And one of the reasons for the success of the tariff policy, or I'll give you two reasons. One is that President Trump has used them for national security.

7:31So the tariff policy has become part of national security, who's able to use the tariffs to negotiate trade deals, when he ratcheted up some of the tariff levels to 35, 49, 50 percent, even 145 with the Chinese, it brings people to the table. In the spring, the president put fentanyl tariffs on Mexico, Canada, China. They've all come to the table to help and partner with the U.S. government to end this scourge on our people. We're seeing fentanyl deaths drop. We, because of the good efforts of China, we made a good faith move and decreased their fentanyl tariffs by half down to 10%. So that's been national security.

8:21Same thing on October 8th when Beijing announced They were going to put a worldwide export license on any product that had 0.01 % of Chinese rare earths in it, which would have ground the Western trading system to a halt. President Trump was able to threaten 100 % tariff, and the Chinese immediately came to the table. The other thing that I would say, so that's all national security. The other thing that I would say that people missed that I was convinced of is that the Chinese business model is based on volume. It's based on employment. It's based on a five-year plan. And I think everyone neglected the idea that despite the tariffs, the Chinese were going to keep producing.

9:12It's one of these, they may lose a dollar on every product, but they make up for it in volume. Can we forecast these tariffs through 28? Or do you think that we have to have moments where whether it's the Supreme Court who's opining on one body of language versus another may change your course? But do you feel confident that we can forecast these revenues now out through the balance of President Trump's term? Well, I think the revenues are a combination of revenues. So the ultimate goal of tariffs, the revenue collection, I think, in a way is a payback for the imbalances that have gone on over the years.

9:55But over time, the real idea is to balance trade and reshore manufacturing and bring our economy into balance with our trading partners. So what should happen is over time, tariff income will come down and U.S. tax receipts will come up, whether it's from factory jobs or more manufacturing and through higher payroll taxes. So we will start off at this very high level. Then we will rebalance and come up. So I think it's difficult to know the timing. We know the direction. We know the destination. but the timing's difficult on tariffs versus increased domestic tax revenues. What I can say is when I got into the investment business in the 1980s, there was always a focus on trade and how much were we making in the U.S.

10:52And again, that everything made outside of the U.S. is a decrease in U.S. GDP. So as we bring it back, I think we're going to start looking more at the content of trade versus domestic manufacturing as a component of GDP acceleration. As we wrap tariffs, we have a Supreme Court ruling coming in January. What happens if that goes against the administration? Well, I don't think it's against the administration. I actually think it's against the American people. And it will be, again, as I said, it will be a hit to national security. And the revenues aren't the focus here. The revenues aren't the focus.

11:39The revenues can be replaced. But all the things that President Trump has been able to do using tariffs on the national security side will be jeopardized. Would you be able to just work with Congress on them? That seems to be how the Constitution was designed, is that the Congress would have this authority. So why not just work with them? Is that the fallback plan? Well, why would you say Congress would have what authority? Well, the Constitution has tariff control. So that's at least my understanding of the U.S. Constitution. And I think that's why there's a Supreme Court case, correct? Well, we'll see.

12:18The president has the right under IEPA for licenses. We've also seen, I was at the Supreme Court, and for your viewers, a bucket list event should be going to see a Supreme Court hearing. It is, in terms of any institution that is the closest to what our framers designed and kind of jumped into business in 1789 it is probably it is surely the closest to what you would have seen at the court they're very convivial with each other yeah i listened to it it's quite compelling content yeah yeah it's and to be there in person uh not not my political leanings, but Justice Kagan was just an intellect of towering impressiveness.

13:14I came away thinking, I am glad that Justice Alito is not my father because he is smart. He is bombastic. And when he got the knife into a couple of the plaintiffs in a line of questioning and he moves it around quite a bit. So, but one line of questioning in this that one of the plaintiffs agreed on was, so, and it was either from Justice Alita or Justice Kavanaugh, was you were telling this court that the president of the United States can do 100 % embargo, but he cannot put on a 1 % tariff. And the plaintiff said, yes. Yeah. And that ruling is coming out in a few months. It's January or February.

14:03January, yeah. Is the expectation, yeah. January, February. And Jason, to your question, I don't know what the ruling is going to be. My guess is everyone, I think that framing is very important in any issue. And I think the framing thus far has been very poor because it's viewed as 0-1. It's up, down. And my guess is it will be more nuanced. Having been in the room, for instance, I think many in the media were at a different hearing than I was at. So when Justice Barrett, Comey Barrett, said, if we undo this, it'll be a mess. That was viewed as just it will be a mess as opposed to. I believe she was actually leaning toward looking for a reason not to undo it because it would the refund.

14:59She was referring to the refunds. The president has absolute ability or the executive branch has absolute ability through 301s, 232s and something called 122s to raise revenue on trade. So using the IEPA is not a stretch of that authority. Okay, so I think the question, and I really appreciate the introspection here on year one and the optimism for year two, Wall Street, the tech industry, we've absolutely loved the results in year one, my portfolio has surged. So that's fantastic. Thank you. Probably beyond my expectation. But Main Street is particularly displeased with the Trump administration's first year.

15:42your net approval rating is the lowest on two key issues inflation net approval rating down about 30 on average since the summer and on the economy 18 net negative and so this is quite paradoxical obviously since trump was elected and considered historically very strong on those two specific issues so the question to you is are the american people wrong or maybe did president trump set expectations too high during the election? Or do you just need more time to execute and you're asking the American people humbly to give you more time? Well, I think it's C, because as Vice President Vance has said, we didn't get here overnight.

16:24We inherited a mess. And I think 2026 is going to be a very good year for the American people for Main Street. And what we you're not going to do is, A, which is what the Biden administration did, and many commentators, whether it was Greg Ipp in the Wall Street Journal, the toxic Paul Krugman, who seems to have been booted from the New York Times and is relegated to Substack, or the former vice chair of the Fed, Alan Blinder, and they said, oh, no, you don't understand how good you have it. Eat your grip, drink your grog, have your bread, peasants. We'll give you a little more. that you, it's a vibe session, and we're going to explain to you why you have it really good.

17:12We understand that the American people are hurting, and I think the way to think about it is there's a price level that things appreciated to during the Biden administration, then there is the inflation level. The price level has gotten very high. I think cumulative CPI during the Biden administration was 21, 22 percent. There's a Wall Street firm called Strategas Research. They do something called the Common Man Index. And it is what working families need, gasoline, insurance, autos, mostly used cars, rent, staples. And that appreciated by about 35 percent. So people are seething over the high price level.

17:59And as we saw in the inflation print this week, inflation is starting to turn down. And affordability is two parts. It is getting the price is under control. Some things we can decrease. Gasoline is coming down substantially. I would expect that it would come down much more. Oil is down substantially. gasoline follows it with a lag rents are down and we are now seeing the effects of what 10 to 20 million undocumented people coming into the country did for rents that this mass unfettered immigration for d and c rent levels was through the roof there there's a study from warden that shows that 1 % of population increase in a city leads to 1 % rent.

18:55So we can see why rent went up, that if the migrants are going home, we are now seeing rents are down about 5%. I think that trend will continue. Again, the inflation numbers are starting to roll down. I think that they will. And then the other side is real incomes, which I think are starting to accelerate. Real incomes are up about 1.8 % since President Trump took office. And that's back to the Main Street question. So just one quick follow up there, and I'll give it back to my compatriots. We need more time. This is not a one year project is going to take two or three years, and we're not going to gaslight you.

19:34And the numbers are looking good. On that note, we had the shutdown. October numbers were not complete. There's a bunch of reports now and hand wringing over those numbers. I think maybe you could address it, which is the BLS filled in a lot of the non-survey data sources with some zeros and potentially the criticism now or the concern on Wall Street and from analysts is that maybe this 2.7 number is over-optimistic. Maybe you could address people's concerns. And can we trust you with the numbers, I think, is what Wall Street's in. Well, again, it's amazing when a good number comes out, then it switches to that.

20:16And Jason, just let me tell you, every Wall Street predictor on Bloomberg was wrong. So what do you do when you're wrong? You blame the measurement, you blame the data. And there's always a lot of imputed data in any of these numbers. That's why we get revisions. And I was looking at the numbers and paradoxically, the two things that I think are coming down the fastest, which are rent. Also, it's known as the owner-occupied funding or owner-occupied rent. That was actually up on the month. I believe it is turned negative. And then the other thing that was up was energy and gasoline, which is an observable event that those prices have decreased substantially from September, October.

21:10So I actually think it was a pretty accurate number. So you've checked into that, the BLS numbers from October, you feel confident they put those placeholders, they put those assumptions incorrectly, you feel confident in that? Look, the BLS is problematic. We've seen that the whole time. I have no reason to believe that this is any less robust than any other data series. And I would say with rent, with energy, that those are very large components that have turned down substantially that were actually recorded a gain for that measurement period. Just to build on that, we had people on our team go and run our own analysis, both using interpolation and other data points.

21:57And we get to exactly Scott's numbers and frankly, on the margin, sometimes slightly better. So I think the trend is very much what you and Kevin Hassett have been talking about in the last couple of days. And gentlemen, I would also point you to Fed Governor Stephen Myron, who came from CEA, who'll be going back to CEA probably in February or March, delivered a very robust speech at Columbia. It was either a week or two ago. And he made some very interesting measurement points on inflation. So one piece of the inflation component is financial services. And that goes up based on whether the stock market's up.

22:41That's right. When in fact, portfolio management costs have come down, that it is showing an increase in costs. So back to Jason's question on BLS, how robust are the numbers? I think there are a lot of changes that could be adjusted to give us a better picture. Let's stay on the affordability topic. And I would like to go to this essay you wrote, which is incredible. The Fed's new gain of function monetary policy, which you wrote in the international economy will link to this article. A lot of it goes to how the Fed in many ways has exacerbated the sense of inequality and the actual factual inequality.

23:22But before I ask you that narrow question, Scott, can you help our viewers just take a step back and give us a little bit of historical context on the Fed itself? So we had a central bank in the 1700s, in the 1800s, Andrew Jackson got rid of it, it came back in the early 1900s. when we established it then versus what it's doing today. And you studied this carefully. Can you help us understand and contrast and compare how it started versus how it's going? Sure. So Fed was created in 1913 as a response to the panic of 1907, which most people don't know about. It made the crash of 29 look like a day at the beach.

24:05Knickerbocker crisis. The Neckarbacker crisis and just a domino effect within the financial system. There was no central bank. Bank of England is a very old central bank and had been functioning well. J.P. Morgan actually had to personally step in in the crisis. And it was deemed that there should be a mechanism for the government to be able to either wind down, provide liquidity and have a greater control on the economy rather than private operators. For much of its history, Treasury had a seat at the table on the Federal Reserve. Post-World War II, that stopped. And then if we look at more recent history, what happened after the great financial crisis, we saw this paralysis in the economy.

24:58I think a huge part of it, which has been part of my regulatory agenda here at Treasury this year through the Financial Stability Oversight Council, is undoing the poorly thought out crisis legislation. But what the crisis legislation did, and look, after financial, I studied and taught at Yale the history of financial crises, there's always retribution. And you go from a lax regulatory regime to an over-constricted regulatory regime. So coming out of the traumatic GFC for 10 years, we had this over-constricted regulatory regime where the Fed was deemed to be the only game in town. So imagine one example would be a home in North Florida that sold for$500 ,000 in 2006.

25:56All of a sudden, people are handing the keys back. It is now$150 ,000. Great buy, great affordability. But because of the new financial regulation and the incentives, the banks were, in some cases, rightly taken to the woodshed for bad behavior. But there was no incentive to give credit at the bottom. So what happened, the asset owners, people with money were able to accumulate assets. We saw very poor growth during the period, during the Obama administration. And the Fed kept rates low for very long. But what the Fed engaged in starting, I believe, was October 6th, excuse me, March 6th or March 8th, 2009, was the Fed began what we call QE or large scale asset purchases.

26:48They went in the market, started buying long bonds. And the theory of the case there is you create liquidity, you take safe assets out of the market, long duration safe assets, and then the people who receive that money would buy more risky assets. Ben Bernanke famously said when he was asked what's the purpose of QE, he told everyone go buy equities. Well, not everyone could buy equities. So we ended up with this two-tier economy where either you were an asset holder or you weren't. And the Fed definitely kept QE going for too long. And I called the Fed the engine of inequality. And someone said to me, well, do you believe that the Fed is responsible for economic equality in the system?

27:45And I said, absolutely not. That is not one of their mandates, but they shouldn't be exacerbating it. And they were the leading cause of it. There's a fantastic book by a I know Karen Petteru very well. She's center left to maybe hard. Not your politics, for sure. Not my politics, but her book, The Fed, The Engine. Her book is excellent. Engine of Inequality. So we just kept pushing up these asset prices. And then we got COVID and markets became disorderly and the Fed did exactly what it should do. It came in, it stabilized the markets, but for some reason they decided that they needed to continue this QE right up until February and March of 2023.

28:38and they were in essence financing this massive debt increase,$7 trillion, that we saw during that period. So it's a long way of saying the central bank has become much more involved in the economy. I think a lot of people don't understand we've gone from what used to be fairly straightforward rate-setting mechanism to now we have kind of this three-headed beast at the Fed or This very complex calculus that I don't think anyone really understands, myself included. You have rate setting policy. You have a balance sheet policy. So the Fed has a very big balance sheet now. And then you have regulatory.

29:23Well, there's a part of your article, which was stunning to me, where you describe how the budget of the Fed works. And effectively, when you understand that, there's a part of the Fed which acts like a hedge fund. and effectively is taking risk and the revenues that they generate are used to subsidize their operations. Can you explain that for folks? Because I didn't fully realize that that was happening. Yeah, well, again, the Fed should make money. Fed typically used to make money and would remit money back to the Treasury. And back to David's question on the budget deficit, the Fed was sending back about 0.3 % of GDP through, we have seniorage, which is the float on the currency.

30:09There are other operations, but then they started QE and no one told the Fed that you're not supposed to buy high. So they paid a high price for bonds, low interest rates, and their arbitrage, the Fed's losing about$100 billion a year now. If you look at one of the key drivers of Main Street's satisfaction with their economic standing, it's the price of debt, the ability for them to buy a home, to buy a car, to extend their lives. And we've got the 10-year Treasury sitting, I think, 4.2 to 4.6 right now in terms of the rate. And I guess this may be a question that brings in two other issues, the fiscal issue and the economic issue.

30:56Is that a reflection of the state of the fiscal affairs of the federal government, the state of the economy, both or the state of markets selling off bonds? And doesn't the Fed have an important role to play in bringing those rates down and making rates accessible for Main Street? Well, I think what the Fed did, unfortunately, they took modern monetary theory from, I say they went from MMT, modern monetary theory, to MMP, modern monetary practice. So the Biden administration issued all this debt and the Fed bought it. And there's a very good study from MIT that's come out that shows in a way that only PhDs at MIT can be very precise.

31:4242 % of the great inflation was caused by the budget deficit. Another 17 % was caused by the increase in inflation expectations, which I think you could tie back to that. So you've got almost 60%, David, that was caused by the spending of the inflation. And I think, again, to go back to my earlier point, I think what we're not getting credit for here is that if we can stabilize the budget deficit, even bring it down, that that will contribute to disinflation. If I think about central bank credibility, in my career, probably post-World War II, no central bank had more credibility than the Bundesbank up until the advent of the euro.