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

The conversation opens as a first-year review, and the first question returns to a goal raised in an earlier discussion: getting the federal budget deficit below 3% of GDP. The response describes 2025 as a year of victories, policy announcements and movement. It treats the year mainly as groundwork, with the economic payoff expected in 2026.

2025 was setting the table. And especially on the economy, I think the feast and the banquet's going to be in 26.

The figures offered are specific. The response says the U.S. fiscal year, which ends September 30, showed a slight fiscal contraction, with the deficit going from about $1.8 trillion to $1.78 trillion, against an estimate of $2.0 trillion. It also says the result got little attention because it was released during the shutdown. For the calendar year, the forecast is a fiscal contraction of roughly $200 to $300 billion, described as between 0.7% and 1% of GDP, with nominal growth close to 6% by year end.

Some of the comparison is political. The response claims the previous administration "blew things out" while trying to get Vice President Harris elected, and that 40% of government spending in 2024 happened in the fourth quarter. It says the deficit-to-GDP ratio peaked at 6.8% for the previous calendar year and is now heading toward the mid-fives. The stated longer-term goal is a ratio "with the three in front of it" by the end of President Trump's term. The response calls deficit-to-GDP "the important number" and links stabilizing it to being able to start paying down debt. The figures are forecasts and claims made in the conversation. No independent data is supplied to check them.

One question says the tariffs have had "an enormously positive impact" and asks why so many people, including former hedge-fund colleagues, predicted otherwise. The answer gives two reasons. The first is partisan reflex: once they became "the Trump tariffs," a large group of officials, industry people and members of the public assumed they must be bad. The answer makes the point with a joke that if the president cured cancer, critics would complain about a dandruff epidemic.

The second reason is what the response calls "a failure of imagination" and an orthodoxy that has not worked. The example is the early-2000s bet that bringing China into the global trading system would make it more like the U.S. The response says it is somewhat sympathetic to people who believed that. But it argues that after Xi Jinping came to power in 2013, writers such as Elizabeth Economy, who had held that view, changed their minds and described a return to "hard communism, Leninism."

The same theme of open-mindedness comes up when the discussion turns to what qualities to look for in a Fed chair. The model offered is Alan Greenspan in the 1990s. He is credited with seeing that the internet and office-modernization boom would bring a productivity bonanza, and with letting the economy run. The response says that period, helped by the Clinton administration and Newt Gingrich's policies, paid down so much debt that by 1998 and 1999 people worried there might not be enough government debt for the financial system's needs. It calls that "the opposite of what we have now."

On inflation, the response points to studies on how goods-price increases are measured. It cites a San Francisco Fed study using 150 years of data, describing the institution as "not a friend of administration." According to the response, the study shows:

that tariffs do not cause inflation, that they're actually disinflationary.

The conversation describes this study only in summary. It does not discuss its methods or any limits on its conclusions.

A follow-up asks a policy trade-off question. Should the new tariff revenue be used to cut taxes and speed up the economy, or to reduce the deficit and eventually pay down debt? Before answering, the response says tariff policy has succeeded for two reasons. The first is that tariffs have become part of national security. High rates of 35%, 49%, 50%, and 145% on China are described as tools that "brings people to the table" in trade negotiations.

Examples given in the discussion: - Fentanyl tariffs imposed in the spring on Mexico, Canada and China. The response says all three came to the table to work with the U.S. and that fentanyl deaths are falling. - A "good faith move" that cut China's fentanyl tariffs by half, down to 10%, credited to China's efforts. - Beijing's October 8 announcement of a worldwide export license on any product containing 0.01% Chinese rare earths. The response says this would have halted the Western trading system. It says China came to the table right after President Trump threatened a 100% tariff.