ROI-Move over, Warsh. Treasury's Bessent also has a credibility problem: McGeever

Scott Bessent's nomination to become the 79th U.S. Treasury secretary ​was met with near-unanimous approval in financial markets. The veteran bond and currency trader was expected to be Wall ​Street's voice in Washington and a bulwark against President Donald Trump's deficit-widening impulses. Nearly two ‌years ​into Trump's second term, the reality has proved very different, calling Bessent's credibility into question. Over the past year, the U.S. Federal Reserve has had a "credibility" cloud hovering over it, reflecting concerns that Trump's influence and potential interference could undermine the central bank's independence. Since Trump’s pick Kevin Warsh became chair three months ago, that cloud has only darkened. Investors have questioned Warsh's willingness ‌to raise interest rates to get inflation back down to target and even his commitment to the Fed's 2% price stability goal. But now his counterpart at the Treasury is also under scrutiny.

Bessent’s recent surprise currency and bond market interventions have come across not as components of a coherent long-term strategy, but as hasty attempts to achieve quick fixes – and investors are taking note. A case in point is the reaction of financial markets to the Treasury's announcement last week that it would at least double the size of long-dated ‌bond buybacks. Inflation expectations, as measured by inflation-linked swap rates, shot up in response, as did gold and cryptocurrency prices, while the dollar fell. Bond yields reversed their initial decline, bumping up against their recent historic peaks - most notably, the ‌10-year yield — Bessent's north star. When Trump nominated Bessent to be his Treasury pick in November 2024, the 10-year yield was around 4.20%. It is now nudging 4.75%, uncomfortably close to 5.00%. Keeping a lid on the 10-year yield - the reference rate for mortgages, credit card loans and corporate borrowing — was one of Bessent's stated goals when he was nominated. By Bessent's own metrics, he is falling short.

"It is not hard to imagine his boss screaming into his ear to ‘do something’ to fix the unwelcome move in borrowing costs, at a time when Trump’s approval rating sits at a record low," wrote Mark Dowding, CIO at ⁠RBC Global ​Asset Management, on Friday, highlighting Bessent’s difficult position. Trump's approval rating has fallen ⁠to 33%, according to a recent Reuters poll, and the midterm elections are barely two months away. The problem for Bessent, of course, is that his hands are essentially tied. His influence over the yield curve is limited, and there's only one person in Washington with any real control over the administration's ⁠spending — and it's not the Treasury secretary.

REALITY OR SALES PITCH? Trump has shown little inclination to cut the deficit. It could come in near a whopping 6.6% of GDP in fiscal year 2026, Congressional Budget Office projections indicate. That would be one of the widest on record outside ​of recessions, financial crises, pandemics or world wars. In an interview with CNBC on Friday, Bessent said there's a "very good chance" the deficit has peaked and that "several hundred billion dollars" could be saved by cutting waste, fraud and abuse ⁠from government spending.

Perhaps that's the case, but the Trump administration has tried this before and it didn't work out too well. Remember DOGE? Tesla and SpaceX CEO Elon Musk was brought in with great fanfare early last year to head the Department of Government Efficiency, which had carte blanche to cut government “waste." Yet it ⁠ultimately ​claimed savings of only $215 billion, roughly 3% of last year's budget. But that figure is hotly disputed by the non-partisan Government Accountability Office, which says "several issues limit the transparency and reliability of these reported savings." Every administration says it will eliminate wasteful spending because that’s an easy sell. Who doesn't want the government to be more efficient? But this claim suggests the deficit can be reduced through relatively "painless" measures. The reality is that serious cuts to entitlement spending or tax increases are likely needed — two things no ⁠president wants to champion. That means any new "fiscal consolidation" plan is apt to be a band-aid on a festering, large, and growing wound.

Trump and Bessent are extremely bullish on what they claim the administration is delivering — the strongest economy in ⁠the world, falling inflation, shrinking deficits, and total victory in Iran. But ⁠Trump's rock-bottom approval ratings suggest voters increasingly aren't buying it, and recent market moves suggest investors' credulity may now be wearing thin too. If so, Bessent's problems could just be getting started.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, ‌and X.

And listen to the Morning Bid ‌daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven ​days a week. (By Jamie McGeever, Editing by Marguerita Choy)