Secretary Bessent’s First Month in Office

Summary

• The incoming Treasury Secretary will likely have two key priorities.
• First is funding the government: expect lower bill issuance and a lower TGA target at the February QRA.
• Second is enacting Trump’s electoral promises, which will probably widen the budget deficit.

Market Implications

• Likely fiscal stimulus adds to my conviction of no cuts in 2025, against markets pricing about two cuts.
• I still expect a December cut, in line with markets.

Before Inauguration

Incoming Treasury Secretary Scott Bessent will face several immediate tasks upon inauguration on 20 January 2025, which I review in this note. While not directly involved in the first two deadlines, he will no doubt be consulted.

Government funding (i.e., the current continuing resolution or CR) expires on 20 December. Congress will most likely pass another CR extending well into the 119th Congress, which starts on 3 January 2025, to give enough time to vote on a budget.

The debt limit suspension ends on 1 January 2025. Congress will likely vote for another extension, possibly until the 120th Congress, starting on 3 January 2027.

Early Executive Actions

Upon inauguration, President-elect Trump is expected to issue several rapid executive orders. These include:

• Initial tariff increases: the broad increases Trump has promised will likely see codification in the forthcoming budget. Still, Trump is likely to rely on section 232 of the 1962 Trade expansion Act and section 301 of the 194 Trade Act to implement early tariff increases. For instance, he will probably good on his 20 November announcement of extra 10% tariff on Chinese goods and 25% on Canadian and Mexican goods.
• Establishing the Department of Government Efficiency (DOGE) as an advisory commission with the White House Office of Management and Budget (OMB). Musk and Ramaswamy, the two DOGE founders, are to meet shortly with Republican Congress leaders to discuss plans to slash government spending.
• Reinstating Schedule F, which removes employment protections for federal employees in policymaking positions.
• First round of immigration changes. These could include ending humanitarian parole for people from Cuba, Haiti, Nicaragua and Venezuela, faster deportations of convicted migrants or deactivation of the CBP One App that allowed asylum seekers to set up appointments online.
• Easing of oil and gas regulation, which Viresh has been discussing.

While Bessent will not be the main decision maker, he will be closely involved with the more economic executive orders. The tariff order could be the first test of his influence on Trump. Before the elections, Bessent expressed a preference for a phased approach to tariffs and saw Trump’s tariff plans as maximalist negotiating positions.

Beyond these first executive actions, the Treasury Secretary will focus on funding the government and building a budget.

Bessent to Extend Maturities, Lower TGA?

The next QRA is on 3 February 2025. The Secretary must decide on issuance structure and cash balance.

The Treasury General Account (TGA), i.e., the Treasury cash balance, is currently $738bn. That exceeds the Treasury’s target of $700bn at end-Q4 and is below the peak at 850bn at end-October (Chart 1). The build-up of a high TGA pre-election could have been in expectations of a Harris win with a split Congress, which would have likely seen a debt ceiling impasse.

Regardless, the current Treasury TGA target of $850bn at end-Q1 is now irrelevant. The level at which current Treasury Secretary Yellen will leave the TGA by inauguration on 20 January is unclear. It is likely to still be above historical averages. With Republicans controlling the White House and Congress, a debt ceiling fight is unlikely over the next two years. The incoming Secretary could therefore decide to lower the balance.

A lower TGA is likely to translate into higher reserves (Chart 2). The RRP, another type of Fed liability, has been declining, and the hint in the Fed minutes that the RRP rate is to be lowered by 5bp will further decrease its attractiveness. This suggests a decline in the TGA is more likely to translate into an increase in reserves than in the Fed RRP.

Secretary Bessent must also decide on the maturity structure of Treasury issuance (Charts 3 and 4). It has recently been a subject of controversy, with economists Miran and Roubini arguing the Treasury has shortened its issuance profile in order to lower long-term yields and boost financial conditions. They argue increased bill issuance has reduced coupon issuance by $800bn and delivered the stimulus equivalent of a 100bp reduction in the FFR.

Unsurprisingly, the Treasury has pushed back, arguing the recent increase in issuance is aligned with historical trends and that it follows the recommendations of TBAC, the Treasury Borrowing Advisory Committee. The Treasury aims to minimize issuance cost over long periods by keeping a ‘regular and predictable’ issuance schedule.

We can expect Bessent to lower bill issuance and possibly introduce new instruments. In a 10 November column, he stated that ‘Treasury Secretary Janet Yellen has distorted Treasury markets by borrowing more than $1 trillion in more-expensive shorter-term debt compared with historical norms.’ He also favours issuing ultra-long bonds, e.g., 50 or 100 years. Secretary Mnuchin had previously considered this policy option but abandoned it following negative feedback from the Treasury Borrowing Advisory Committee (TBAC), composed of market practitioners.

Yet Bessent has also acknowledged that ‘Terming out that debt in favor of a more orthodox borrowing profile may increase longer-term interest rates and will need to be deftly handled.’ This suggests gradual implementation of new issuance principles.

Besides funding the government, the Secretary’s other key focus will be the forthcoming budget.

Accelerated Budget Process

The US budget is a lengthy process involving multiple steps (Table 1). A budget comprises 12 appropriation bills providing detailed funding to the 12 government departments.

Since the mid-1970s, Congress has only managed to pass a full budget on time four times. Most often, the government is funded through continuing resolutions (CR) that extend previously agreed government funding or through hodgepodge funding bills often passed in the last days of a Congress.

The Treasury’s role in the budget process is mainly execution and oversight. Also, in the planning process, it provides revenues estimates and advice. Since tax cuts are a key plank of the Trump administration program, the Treasury will likely be a key player in this year’s budget.

This time, Republican legislators have signaled they want to have a budget ready for the president’s signature by the 100th day of the incoming administration, even though the TJCA ‘Trump’ tax cuts only expire at end-2025. They are already working on their strategy.

Since the Republicans control both houses of Congress, they should have little difficulty getting their budget adopted. They plan to use reconciliation, which allows a common budget law to be adopted by a simple Senate majority, rather than requiring a filibuster-proof majority. This implies that only expenditures- or revenues-related rules can be included in the budget law and that changes to social security cannot be considered either.

That said, while the Republican Senate majority (53 out of 100 seats) is comfortable, their House majority is narrower, likely 221 to 213. Therefore, the budget proposal must secure the support of all Republicans, including the fiscal hawks.

There is still great uncertainty around the budget. For instance, we do not know the extent of expenditure cuts DOGE will be able to generate or even how DOGE will be involved in the budget-making process. Table 2 summarizes the Committee for a Responsible Budget’s estimates for the cost of Trump’s proposals. Their range of estimates is extremely wide, which shows the uncertainties involved. I will provide updates as they become available.

The extension of TJCA tax cuts, estimated by the CBO to cost $4.6tn over 10 years, is basically a change from the baseline that assumes they expire at end-2025. Based on the expiration of the Trump tax cuts at end-CY2025, the CBO expects the FY2025 deficit to fall to 6.5% of GDP from 7% in FY2024. If the Trump tax cuts are maintained, the CBO expects the budget deficit to rise $216bn or 0.7ppt of GDP in FY2026 relative to baseline.

Additional measures promised by Trump are relatively less ‘expensive’ than the tax cut extensions and could be funded through tariffs revenues or expenditure cuts.

That is not to say the Trump tax cuts extension will place the US on the path to fiscal rectitude. They are more likely to make an already unsustainable fiscal path more so rather than to lead to a short-term explosion in the deficit (Chart 5 and 6).

Market Consequences

Early signs are that President-elect Trump remains in charge of the economic agenda. Based on his campaign promises, the budget is likely to add stimulus to the economy, which is already experiencing resource pressures. This reduces the likelihood of continued disinflation in 2025 and therefore of Fed cuts. I therefore continue to expect no Fed cut next year, against the market pricing about two cuts.

I continue to expect a December cut, based on the next core PCE estimate remaining close to 25bp MoM and on a large negative NFP surprise in December. My conviction aligns with markets pricing about a 70% chance of a cut.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)