Bessent's forward guidance: US interest rate cuts, Japan interest rate hikes

Bessent's recent statements have sparked a strong reaction in the global financial markets, not only due to their aggressive nature but also because of his unique position. As the U.S. Secretary of the Treasury, he has rarely crossed functional boundaries to provide clear guidance on the Federal Reserve's future policies—suggesting a 50 basis point rate cut starting in September, followed by a cumulative reduction of at least 150 to 175 basis points.

He emphasized that "whatever model" leads to this conclusion and stated that if he had known about the Labor Department's significant downward revision of non-farm employment (a total reduction of 258,000 jobs in May and June) before the last meeting, the rate cuts in June and July could have been implemented earlier. This assertion clearly exceeds current market implied expectations: the Federal Reserve's target interest rate range is currently 4.25%-4.5%, and a 150 basis point cut would bring the midpoint down to 2.88%, while the market bets that it won't reach 3% until next fall. The two-year U.S. Treasury yield remains high at 3.68%, highlighting the gap.

More notably, Bessent also suggested that the Bank of Japan should raise interest rates. He believes that the U.S. needs to quickly cut rates to alleviate the pressure of high real interest rates on credit, real estate, and small to medium-sized banks, preventing a hard landing for the economy; while in Japan, under the backdrop of rising wage growth and inflation expectations, a rate hike would help stabilize price expectations and the yen exchange rate. This "U.S. rate cut, Japan rate hike" policy misalignment will reshape the global interest rate differential structure, triggering capital flows, exchange rate fluctuations, and asset price repricing.

As a result, Powell's situation becomes more complex. Factors such as sticky inflation, fiscal deficits, geopolitical shocks, and the rise in long-term interest rate term premiums collectively weaken the traction of a single interest rate tool on the market. When the central bank's communication anchors loosen, the market will seek narrative sources that can explain cross-asset logic, and Bessent's framework conveniently provides an actionable global perspective.

This could lead to a series of chain reactions: the dollar may come under pressure due to narrowing interest rate differentials but retains its safe-haven attributes; the yen is expected to undergo valuation recovery under the expectation of policy normalization but with increased volatility; the probability of a steepening U.S. Treasury curve rises; and the stock market, precious metals, and commodities will also be affected in different directions. This "new forward guidance" initiated by the Secretary of the Treasury seems to lay the groundwork for the start of a new cycle.

Bessent's latest statements have caused ripples in the financial markets, not only due to the aggressive numbers but also because of who is speaking. For a long time, shaping interest rate expectations has been the exclusive domain of the Federal Reserve, and Treasury Secretaries often deliberately maintain distance from monetary policy to avoid blurring the lines of responsibility. However, this time, Scott Bessent has depicted the rate cut path he envisions with almost "central bank-like" precision—starting with a 50 basis point cut in September, followed by phased reductions totaling at least 150 to 175 basis points. "Whatever model," Bessent confidently stated in front of the cameras, "the conclusion points to this result." More dramatically, he pointed out that if the Federal Reserve had known about the non-farm revision data released on August 1—showing a total downward revision of 258,000 jobs in May and June—then rate cuts in June and July might have already occurred Such a judgment is clearly at odds with the mainstream pricing in the current market. The current target range for the federal funds rate is between 4.25% and 4.5%. If interest rates are cut by 150 basis points, the midpoint would drop to 2.88%, while federal funds futures imply that it may not reach 3% until next fall. The two-year U.S. Treasury yield remains stable at a high of 3.68%, reflecting that investor expectations are much more conservative than Bessent's blueprint. For a Treasury Secretary, such a forward-looking and explicit expression is extremely rare. Even more unexpectedly, Bessent added that the Bank of Japan should raise interest rates at this moment.

The apparent contradiction in this combination actually stems from different endpoints of the same logical chain. For the U.S., he sees that high real interest rates are increasingly pressuring credit creation, the real estate market, and regional banks; even though inflation's stickiness has not completely dissipated, the lagging effects of slowing growth and tightening financing conditions are accumulating into potential hard landing risks. Bessent's thinking is that rather than dragging it out until the situation worsens, it is better to decisively release pressure through interest rate cuts and manage expectations with clear rate cut magnitudes, reducing the passive deleveraging of the financial system.

In Japan, he notes another risk—wage growth and price levels have finally synchronized after many years, and the realization of the inflation target no longer relies on external input costs but is beginning to show signs of endogenous cycles. If ultra-low interest rates are maintained at this moment, it could not only lead inflation expectations to slide towards "mildly out of control," but also passively bear the impact of carry trades amid global interest rate changes. In Bessent's view, moderate rate hikes are not just the beginning of monetary normalization but also an opportunity to restore the function of the yield curve and improve yen valuation.

This "U.S. rate cuts and Japan rate hikes" strategy, once adopted by the market, would trigger a chain reaction in global capital flows and asset pricing. Changes in the interest rate structure would alter the gravitational field of capital: the dollar could come under pressure due to a relative decline in interest rate advantages, especially in a scenario where rate cuts are understood as a turning point in the cycle; the yen is expected to attract some safe-haven and arbitrage funds back, but with higher volatility. In the bond market, the decline in U.S. short-term rates may outpace that of long-term rates, as term premiums and fiscal supply pressures would suppress the decline in long-term rates, thereby increasing the probability of a steeper curve. In the stock market, the decline in the discount rate for U.S. stocks provides support for valuations, but if earnings downturn confirms recession risks, the upward momentum will be limited; the Japanese stock market needs to find a balance between valuation compression and structural benefits such as improved corporate governance and rising ROE. Commodities and gold may benefit from a weak dollar and easing expectations, but slowing global demand means that cyclical goods are more likely to experience a divergence of "stable prices and weak volumes."

In this context, Powell's situation becomes delicate. In recent years, the Federal Reserve has managed market expectations through careful wording, trying to keep changes in financial conditions aligned with policy goals. However, when inflation stickiness, fiscal deficits, geopolitical shocks, and duration risks all come into play, a single interest rate signal is hard to dominate pricing. Bessent's intervention is not only a public pressure on current monetary policy but also a form of "parallel forward guidance"—it does not rely on the FOMC's dot plot but could have an equally significant impact on actual market trading behavior. This decentralization of communication power means that investors will need to sift through and weigh more diverse sources of signals in the future The influence of Bessenet is not accidental. What he provides is not just a policy forecast, but a framework that coexists with relative tightening and relative easing from a global perspective—within which, the U.S. monetary environment will adjust towards easing, while Japan will move towards mild tightening, and the misalignment between the two provides a clear reference for cross-market strategies. For fund managers, the appeal of this framework lies in its operability: it not only indicates the direction but also retains the flexibility to adjust the pace based on data and events.

Ultimately, the core of this debate is the repricing of the global financial cycle. When the real financing costs in the U.S. are too high and Japan's delayed normalization process coincide within the same time window, the map of global risk premiums will be rewritten. In this rewriting process, whoever can tell the most coherent and explanatory story about cross-market logic may gain the discourse power. At this moment, Bessenet seems to have taken the lead. The dot plot remains important, but it is no longer the only North Star; market participants need to learn to navigate through multiple signals, which may be the true footnote to the opening of the new cycle.

Authors: Zhou Hao, Sun Yingchao, Source: GTJAI Macro Research, Original Title: "【Guotai Junan International Macro】Bessenet's Forward Guidance: A Jealous Momentum"

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