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

Fiscal Policy & Deficit Reduction

🏛️ Q: What is the 2025-2026 deficit trajectory? A: US fiscal year 2025 saw deficit of $1.78T (better than estimated $2T), with 2026 forecasted at $200-300B contraction, bringing deficit-to-GDP from peak 6.8% to mid-5% range.

💰 Q: How does deficit reduction contribute to disinflation? A: MIT study showed 42% of recent inflation caused by budget deficit and 17% by inflation expectations, meaning stabilizing deficit could significantly reduce inflationary pressure.

📈 Q: What drove US bond market performance in 2023? A: US had best performing bond market since 2020 due to fiscal progress and anchored inflation expectations, despite China selling down holdings.

Tariff Strategy & Trade Policy

🎯 Q: What tariff rates are being used for trade negotiations? A: 35-145% tariffs on China brought them to negotiating table, fentanyl tariffs on Mexico reduced deaths, and 100% tariff threat on China's rare earth export restrictions.

🔄 Q: What is the long-term goal of tariff implementation? A: Tariffs aim to rebalance trade, reshore manufacturing, and reduce deficit, with tariff income expected to decrease while domestic tax revenues from manufacturing jobs increase over time.

📊 Q: Are tariffs inflationary or disinflationary? A: San Francisco Fed study shows tariffs may be disinflationary, contrary to common assumptions about their price impact.

🏭 Q: Which industries are targeted for state capitalism approach? A: Strategic industries include semiconductors, pharmaceuticals, steel, and shipbuilding to ensure US production and supply chain resilience driven by national security concerns.

Inflation & Cost of Living

💵 Q: How did real inflation compare to official CPI? A: Biden administration saw 21-22% cumulative CPI increase, while Common Man Index tracking gasoline, insurance, autos, and rent rose 35%, indicating higher real inflation for working families.

⛽ Q: Which major expense categories are showing disinflation? A: Rent and owner-occupied funding turned negative, while energy and gasoline prices decreased substantially from September to October 2023 according to BLS data.

Federal Reserve & Monetary Policy

🏦 Q: How did Fed's QE policy impact inequality? A: Fed's QE and low rates for too long exacerbated inequality by benefiting asset owners, while over-constricted regulations post-GFC limited credit access for non-asset owners.

📉 Q: What distortions did Fed's asset purchases create? A: Fed's large-scale asset purchases since 2009 distorted economy by pushing up asset prices and keeping them elevated, despite normalizing interest rates.

Tax Policy & Economic Stimulus

💼 Q: What tax cuts are planned for 2026? A: Tax cuts in 2026 to boost capital expenditures and employment, with working Americans seeing tax breaks on tips, overtime, and social security, plus corporate tax cuts retroactive to January 20th.

👶 Q: What is the Trump accounts proposal? A: Trump accounts giving every child $1,000 at birth to increase equity ownership and financial literacy, with parents, employers, and philanthropists like Michael Dell topping up accounts.

Banking & Lending

🏦 Q: How will small banks benefit from regulatory changes? A: Small and community banks to see increased lending capacity and profitability from regulatory loosening, with these lenders accounting for 70% of lending, 30-40% of real estate lending, and 40% of small business lending.

Trade Competition & Chinese Business Model

🇨🇳 Q: How does Chinese business model respond to tariffs? A: Chinese business model relies on volume, employment, and 5-year plans, with studies showing 1% population increase in city leads to 1% rent increase, suggesting tariffs may not significantly impact Chinese production.

🌏 Q: Which countries are viewed as unfair trade competitors? A: China, Vietnam, and some European countries viewed as unfair competitors due to high subsidies in strategic industries.

Legal & Regulatory Framework

⚖️ Q: What legal challenges could impact tariff authority? A: Supreme Court ruling in January/February 2026 could impact tariff authority, with president having ability to raise trade revenue through 301, 232, and 122 provisions.

🎯 Q: What is the primary focus beyond tariff implementation? A: Focus should be on balancing trade and reshoring manufacturing rather than solely maximizing tariff revenue collection.

Fiscal Policy & Deficit Management

1. 🏛️ US achieved $1.78T deficit in 2025, better than estimated $2T, with forecasted $200-300B contraction in 2026 bringing deficit-to-GDP from peak 6.8% to mid-5% range through fiscal discipline.
2. 📊 Biden administration saw 21-22% cumulative CPI increase, while Common Man Index by Strategus Research tracking essential expenses for working families rose 35%, explaining perception gap on inflation.
3. 💰 US had best performing bond market since 2020 in 2023 due to fiscal progress and anchored inflation expectations, with tariffs shifting from threat to potential fiscal payoff.

Tariff Strategy & Trade Policy

1. 🛡️ Tariffs deployed for national security under Trump, addressing fentanyl crisis with Mexico resulting in 50% reduction in fentanyl tariffs and decrease in fentanyl deaths through negotiated trade deals.
2. 🏭 Chinese business model relies on volume, employment, and 5-year plans, believing they could continue high production despite tariffs and make up losses through volume strategy.
3. ⚖️ Supreme Court ruling in January/February 2026 could challenge president's tariff authority under AIPA, though executive branch retains revenue-raising ability through 301s, 232s, and 122s.
4. 🎯 Administration expects tariff income to decrease over time while US tax receipts from reshored factory jobs and manufacturing increase, balancing trade and bringing economy into equilibrium with partners.

Federal Reserve Policy & Asset Bubbles

1. 💸 Fed's QE kept going too long, exacerbating inequality by pushing up asset prices, with Biden administration's deficit spending contributing 42% of recent inflation according to MIT research.
2. 🏦 Fed's large-scale asset purchases since 2009 traditionally focused on government bonds, but during COVID bought high yield and corporate bond indices, emergency powers that should only be used in crises.
3. 🔀 Fed evolved from straightforward rate setting to three-headed beast of rate setting, balance sheet policy, and regulation, creating complexity few understand and moving beyond traditional mandate.
4. 📈 Fed's low interest rates and QE after 2008 allowed asset owners to accumulate wealth while non-asset owners struggled, with Fed exacerbating inequality despite not being responsible for economic equality.
5. 👥 Fed candidates like Kevin Hasset, Chris Waller, and Rick Reed advocate for smaller Fed footprint, predictability, centers of excellence for regional banks, and return to traditional Fed role.

Inflation Components & Price Dynamics

1. 🏠 Rent and owner-occupied funding turned negative while energy and gasoline prices decreased substantially from September to October 2023 according to BLS data, with largest components turning down fastest.

2026 Economic Initiatives

1. 💳 Trump accounts give every child $1,000 at birth with allowance for up to $5,000 more from family, employers, and philanthropists like Michael Dell, increasing financial literacy and equity ownership.
2. 🏗️ Capex boom from tax cuts and trade deals, exemplified by Boeing's 50% plant expansion in Charleston, SC, will accelerate in 2024 leading to employment boom as companies invest in equipment and factories.
3. 💼 Treasury promises increased credit availability from small banks, no inflation from deficits, and rising working wages through tax cuts and regulatory changes, with bottom 50% seeing better net worth gains than top 10%.

Strategic Industrial Policy

1. 🔬 State capitalism in strategic industries targets semiconductors (97% in Taiwan), pharmaceuticals (80-90% precursor chemicals in China/India), steel, and shipbuilding for national security and economic stability.
2. 🎯 Administration aims to reshore manufacturing in critical sectors where foreign concentration poses national security risks, balancing free market principles with strategic industrial policy for essential supply chains.

• 00:00 💸 US Treasury Secretary aims to reduce budget deficit to 3% of GDP by 2026, forecasting significant economic growth and a $200-300 billion fiscal contraction in 2024.
  • Treasury Secretary Scott Bessent reviews the US government's fiscal condition, economic state, and administration policies, specifically addressing progress toward getting the budget deficit below 3% of GDP and outlook for fiscal year 2026.
  • 2025 was about setting the stage for 2026, which is expected to bring significant economic growth and benefits.
  • The US is making progress in reducing its budget deficit, with a forecast of a $200-300 billion fiscal contraction for 2024, and aims to stabilize the deficit-to-GDP ratio to around 3% by the end of President Trump's term.
• 03:23 💰 Treasury Secretary Scott Bessent discusses balancing economic policies, including tariffs, to drive US growth, reduce debt, and rebalance trade, contrasting past successes with current challenges.
  • Many people, including government officials and industry experts, failed to objectively assess Trump's policies, such as tariffs, due to a close-minded orthodoxy that has often proven ineffective.
  • Treasury Secretary Scott Bessent praises Alan Greenspan's 1990s economic policies, which allowed the US economy to thrive during the internet boom, and contrasts them with current economic challenges.
  • Tariffs are disinflationary, not inflationary, and can be used to either reduce the tax burden on the economy or as a revenue source to cut the deficit and debt.
  • The US tariffs on China, driven by national security concerns, aim to balance trade, reshore manufacturing, and bring the economy into balance with trading partners, with expected outcomes of decreased tariff income and increased US tax receipts over time.
  • The US will rebalance its economy by focusing on domestic manufacturing and content of trade to accelerate GDP, but faces uncertainty on timing and potential setbacks from a Supreme Court ruling on tariffs.
  • The US Constitution grants Congress authority over tariff control, but the President also has rights under AIPA to issue licenses, potentially conflicting with Congressional authority.
• 12:57 💰 Treasury Secretary Scott Bessent discusses the impact of Trump's economic policies, inherited economic challenges, and predicts 2026 will be a good year, citing declining inflation and increasing real incomes.
  • A Supreme Court case suggests the President has authority for a 100% embargo but not for a 1% tariff, with a ruling expected in a few months.
  • The outcome of the ruling will likely be more nuanced than a simple up or down vote.
  • The Trump administration's economic policies have yielded vastly different outcomes for Wall Street and Main Street, with Wall Street thriving but Main Street expressing discontent, particularly over inflation and economic issues.
  • The speaker attributes current economic challenges to inherited problems, requests patience, and predicts 2026 will be a good year for the American people under their plans.
  • The price level has increased significantly, with a 21-22% cumulative CPI and 35% increase in essential costs, but inflation is starting to decline, driven by decreases in gasoline and oil prices.
  • Rents are down 5% as migrants return home, inflation numbers are decreasing, and real incomes have increased 1.8% since President Trump took office, indicating a positive economic trend.
• 20:38 💸 Treasury Secretary Scott Bessent discusses balancing Fed policies, inflation, tariffs, and economic plans, highlighting concerns on quantitative easing, inflation measurements, and the Fed's evolving role.
  • The speaker believes the October BLS numbers accurately reflect a decrease in inflation, driven by declines in rent and energy prices, after verifying with their own analysis.
  • Fed Governor Steven Myron notes that inflation measurements, such as financial services, can be misleading, as they show increases in cost even when actual costs, like portfolio management, have decreased.
  • The Fed was created in 1913 in response to the 1907 panic, and its role and functions have likely evolved significantly since its inception.
  • The creation of the Federal Reserve was a response to financial crises, such as the one in 1907, where private operators like JP Morgan had to step in, and its history with the Treasury has evolved, including a period of regulatory overreach following the 2008 crisis.
  • The Fed's prolonged quantitative easing, intended to stimulate the economy, instead created a two-tier economy that exacerbated inequality by benefiting asset holders at the expense of others.
  • Treasury Secretary Scott Bessent praises Karen Pedaru's book "The Fed, the Engine" despite their political differences.
• 28:09 💸 The Federal Reserve's quantitative easing policies and large balance sheet have driven inflation, sparking debate on their effectiveness and necessity in stabilizing the economy.
  • The Federal Reserve's increasing involvement in the economy, including quantitative easing and a large balance sheet, has created a complex situation where the central bank acts like a hedge fund, generating revenue to subsidize its operations and remitting some back to the Treasury.
  • The Fed's large-scale bond purchases, fueled by the budget deficit, have driven inflation, with 42% of it caused by the deficit and 17% by increased inflation expectations, and stabilizing the deficit could contribute to disinflation.
  • The speaker questions the Federal Reserve's quantitative easing policies, citing their distorting effects on the economy, and asks if the policies should be revised or eliminated, particularly regarding the selective purchasing of corporate debt.
  • The Fed's large-scale asset purchases, which began in 2009 and continued through COVID, should be used as an emergency tool, not a prolonged one, to stabilize markets and provide liquidity, rather than propping up asset prices.
  • US bond market remains attractive due to fiscal progress, anchored inflation expectations, and the country's relative economic strength, with a goal to get inflation back to 2%.
  • Achieving a target inflation rate is necessary to re-anchor expectations and establish credibility before discussing a range for that rate.
• 39:58 💰 US Treasury Secretary Scott Bessent advocates for a smaller Federal Reserve footprint, looser financial regulations, and balanced economic growth to control inflation and level the playing field ahead of 2026 plans.
  • Potential Fed candidates, including Chris Waller and Rick Reed, aim to shrink the Fed's footprint in the economy and its institution, addressing its unchecked growth and privileged financial status.
  • The US Treasury Secretary advocates for a return to a more traditional Federal Reserve role, with a smaller footprint, increased predictability, and potential reforms such as eliminating the "dotplot" and streamlining regional bank functions.
  • Treasury Secretary Scott Bessent suggests that while the administration can influence factors like interest rates, it cannot directly control the supply of homes or housing prices, which may limit what can be promised to Main Street in 2026.
  • The US Treasury is loosening financial regulations to enable small and community banks to lend more, increasing credit availability, as they account for 70% of small business and 40% of real estate lending.
  • The Trump administration aims to balance economic growth with measures such as increasing working wages and leveling the playing field, without exacerbating inflation through budget deficits.
• 45:42 💰 US Treasury Secretary Scott Bessent discusses plans to boost economic growth, national security, and financial literacy through strategic investments, tax reforms, and new programs to increase equity ownership and employment.
  • The US administration's increasing investments in private industries and equity stakes in key businesses may be seen as a form of state capitalism, driven by strategic interests to counter unfair trade practices from competitors with high subsidies.
  • The US must develop endogenous production in strategic industries, such as pharmaceuticals, semiconductors, steel, and shipbuilding, to ensure national security and reduce reliance on unreliable foreign suppliers, particularly China.
  • The tax bill's signature parts, including immediate expensing for businesses and trade deals, are expected to accelerate a capital expenditure boom, turning into an employment boom, with visible results starting in 2026.
  • The administration's tax bill, effective retroactively to January, will likely result in $1,000-$2,000 refunds for working Americans due to unchanged withholding schedules.
  • The proposed Trump accounts, which would give every child $1,000 at birth, aim to increase financial literacy, ownership, and optimism in the market, potentially raising equity ownership from 38% to 100% of Americans.
  • A new program aims to merge Main Street and Wall Street by allowing individuals to participate in the market, with contributions from parents, philanthropists, employers, and states to fund accounts.
• 56:22 👏 Treasury Secretary Scott Bessent expresses gratitude for the opportunity to serve the American people and appreciation for the discussion.

WatchUrl: https://www.youtube.com/watch?v=G0GuHkUbuEY