TIMIRAOS reports US Treasury Secretary BESSENT’s policy reaction function has
moved away from being plainly dovish. His comments this year imply the Fed
should keep rates unchanged; earlier he cited models suggesting the policy rate
could be about 25–100bps above neutral. On Aug. 4 BESSENT made two points: he
Fed chair Walsh’s decision last week not to specify a policy reaction
function to preserve optionality, and he also outlined a more dovish reaction
function that urges ignoring recent shocks—asking what higher short-term rates
will achieve and noting underlying inflation (core ex-energy) is very muted and
stable, a pattern he expects to persist.
