Under the Trump administration, Scott Bessent has recently assumed the role of US Treasury Secretary, where he needs to address substantial economic stability issues.
Three principal duties for Bessent involve bond yield regulation, avoiding economic downturns during spending cuts, and controlling oil price changes, currency fluctuations, and price instability. A crucial part of his strategy depends on Elon Musk’s Department of Government Efficiency, or D.O.G.E.
Bond Market Strategy and Short-Term Borrowing
Bessent’s approach to government debt has drawn scrutiny from financial analysts. His first quarterly funding announcement followed Janet Yellen’s strategy by focusing on short-term bonds instead of long-term options. Despite market expectations of longer maturities, he borrowed funds for shorter periods. The approach provides adjustment time but causes investors to watch market responses cautiously.
Challenges with Oil Prices and Inflation
The price of oil creates difficulties for Bessent. Trump’s promise to raise domestic oil output was designed to combat inflation without considering that energy markets function more complex than anticipated. Declining oil prices do not surely mean lower borrowing expenses. The use of energy futures by investors in inflation-protected securities (TIPS) leads to unpredictable impacts on their investment inflation expectations.
Research from Absolute Strategy Research indicates that energy costs comprise a smaller portion of production expenses. Economic perturbations from oil price increases similar to previous decades will not emerge since prices would only double. The challenge to decrease oil prices intensifies as Trump plans to restore stocks in the Strategic Petroleum Reserve thus boosting market demand. The Organization of the Petroleum Exporting Countries (OPEC) could oppose American attempts to modify worldwide petroleum production levels.
Federal Spending Cuts and Economic Stability
Reducing federal spending is another significant hurdle. Data from BCA Research shows that spending must decrease by 3.6% to stabilize the debt-to-GDP ratio. Achieving this requires congressional approval, which is expected to be a challenge. Musk’s D.O.G.E team is identifying inefficiencies and implementing spending cuts, but miscalculations could lead to financial instability. Excessive cuts risk a recession, while insufficient reductions could trigger a bond market crisis.
Bessent is also working to prevent Trump from interfering with the Federal Reserve. While Trump has previously expressed interest in influencing interest rate decisions, Bessent reassured lawmakers at his Senate confirmation hearing that maintaining central bank independence is essential. His strategy includes replacing Fed Chair Jerome Powell with a market-friendly candidate, with former Fed governor Kevin Warsh as the leading choice.
Meanwhile, Trump has ordered the Treasury to halt penny production, citing excessive costs. His announcement on Truth Social emphasized eliminating wasteful spending, aligning with broader budget reduction goals. However, tensions between D.O.G.E and the Treasury escalated after Musk’s team accessed government financial data, leading a federal judge to block further access temporarily.
The strength of the dollar remains a pressing concern. Historically, when oil prices decline, the dollar strengthens, making imports cheaper but weakening US exports. Trump’s economic policies rely on boosting exports, making it crucial for Bessent to prevent excessive dollar appreciation while managing inflation.