Bessent Clashes with Senior Fed Officials: Does Inflation Stem from an Energy Shock or Overheated Demand? Debate Over the Fed's Rate-Hike Path Intensifies

US Treasury Secretary and Chicago Fed President Clash Publicly Over Root Cause of Inflation, Reflecting Deepening Policy Divergence Between Washington and the Fed and Casting More Uncertainty Over the Fed's December Meeting US Treasury Secretary Scott Bessent called on the Fed in a CNBC interview on Friday not to aggressively raise rates in response to the "energy supply shock" triggered by the Iran war. Chicago Fed President Austan Goolsbee responded immediately on the same program, noting that inflation has spread to services, healthcare, and other areas with low correlation to oil prices, and has been driven up by strong demand fueled by AI data center construction far beyond what rising energy prices can explain. Goolsbee stated explicitly that the Fed "has a lot of work to do" to rebuild policy credibility. Recent stronger-than-expected employment and inflation data have further reinforced the case for the Fed to continue raising rates, with some officials even beginning to discuss an unconventional 50-basis-point hike at the December 8-9 meeting. Bessent: Energy Shock Driving Inflation, Fed Should Not Rashly Reverse Course In the CNBC interview, Bessent attributed current inflation to oil price increases triggered by the Iran war and criticized the Fed's policy stance. He said US overall economic fundamentals remain strong, and current inflation data is essentially "noise" that the Fed should not use as grounds for aggressive rate hikes. "The Fed should be looking forward, not staring in the rearview mirror," Bessent said. He also referenced the Fed's rate cuts last year, arguing that sharply reversing policy direction amid an energy supply shock "is not what I would do at the Fed." He also said he was not seeking to directly interfere with Fed decision-making, but hoped the Fed would "keep an open mind." This stance is consistent with the Trump administration's overall messaging administration officials generally emphasize the oil-driven nature of inflation and hold a critical position on the Fed's approach. Goolsbee: Inflation Has Gone Beyond Energy, More Worrying Goolsbee expressed respect for the Treasury Secretary's judgment but clearly offered a different view. He noted that the persistence and breadth of inflation have exceeded what energy and tariff shocks can explain services inflation, rising healthcare costs, and overheated demand driven by AI data center construction have all become independent factors pushing prices higher. "Tariff inflation and the oil price shock should be fading by now, but they are not," Goolsbee said. "If demand is overheating and feeding inflation, that is the more worrying situation." He stressed that services inflation "will not disappear regardless of how oil prices change." On the question of inflation returning to the 2% target, Goolsbee was blunt: "My current assessment is that we are not yet on the right track, and we must face this reality." He said upcoming inflation data will be the key basis for judging whether the Fed needs to accelerate the pace of rate hikes. Research Shows Oil-Inflation Relationship More Complex Although the Trump administration mainly blames oil prices for inflation, according to Reuters, related research is revealing another side of how oil prices affect the US economy. Because the US has become a net energy exporter, rising global oil prices not only bring supply-side cost pressures but also transmit into the economy through channels such as higher corporate profits and wage growth, creating demand-side inflationary momentum independent of supply factors. This means the Fed cannot simply "look through" current inflation the way it would handle a pure supply shock. Fed officials initially considered taking a wait-and-see approach to supply-driven inflation at the start of the Iran war, but as inflation remained persistently above target, the stance favoring rate hikes gradually gained the upper hand. December Meeting Outlook: Debate Over Rate Hike Magnitude Heats Up Recent data are driving market expectations for a more aggressive rate hike path. Stronger-than-expected employment and inflation reports have led some Fed officials to begin discussing the possibility of a 50-basis-point hike at the December 8-9 meeting, rather than the usual 25 basis points. Although Goolsbee did not explicitly commit to a rate hike, his language suggests a tightening policy stance. "We have seen unfavorable signals of broadening inflation for several consecutive months," he said. "In categories unrelated to oil prices and tariffs, progress remains stalled, and some are even deteriorating." This public divergence between administration officials and the Fed will keep attention on the Fed's policy independence elevated, and inflation and employment data trends before the December meeting are expected to become the core variables in focus for markets. This article is reposted from "Wall Street See" (), author: Yang Chen, GMTEight editor: Li Cheng