The Fed can cut rates next year, even in the face of strong growth

The Trump administration said Tuesday that it expects the economy to grow at a pace of 3% and that the Federal Reserve can continue to lower interest rates in that environment.

Joe Lavorgna, counselor to Treasury Secretary Scott Bessent, told Yahoo Finance in an interview that the economy is experiencing a boom without inflation tied to President Trump’s deregulatory, pro-growth policies, boosted by capital spending.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

He noted that if the economy continues to grow at 3% next year on supply side increases, that will spell lower inflation. He stressed that if interest rates adjusted for inflation are held steady, then they essentially restrict the economy further because inflation is falling.

“So, the Fed can continue to lower rates,” Lavorgna said. “The Fed should lower rates based on its own estimates of where our star is, the neutral rate, and based on the fact that interest-sensitive activity is still extraordinarily weak, and that’s where monetary policy has the most impact.”

Equity markets wavered earlier in the trading session on Tuesday as investors digested whether a stronger-than-expected GDP reading in the third quarter would stop the Fed from lowering rates next year. GDP for the third quarter clocked in at 4.3% as consumer spending — which accounts for 70% of growth — rose 3.5% and exports surged with trade adding 1.6%.

“In the old days, when there was good news, the Market went up,” President Trump wrote on Truth Social. “Nowadays, when there is good news, the Market goes down, because everybody thinks that Interest Rates will be immediately lifted to take care of ‘potential’ Inflation.”

Trump said he expects his next Fed chair to lower interest rates if the economy is doing well.

“I want my new Fed Chairman to lower Interest Rates if the Market is doing well, not destroy the Market for no reason whatsoever,” Trump wrote. “Anybody that disagrees with me will never be the Fed Chairman!”

Fed officials have penciled in just one rate cut for all of next year amid division on the committee about getting inflation back to the central bank’s 2% target.

Although overall GDP was strong in the third quarter, business investment growth slowed to 2.8%, with equipment investment growth slowing to 5.4%. Despite the data center mania, investment in non-residential structures contracted at a 6.3% pace.

Lavorgna claimed structures were soft because the Fed is keeping interest rates too high.

“If interest rates come down with the expensing we’ve got for the factories, we will build a whole lot more next year,” he said. “That’ll be high-paying construction jobs. All the capital that will go into those new buildings that will be fully expensed. And of course, the workers that will be there because manufacturing pays higher than average wage rates.”

Lavorgna also noted that people are overestimating the effect of AI on the GDP numbers because a lot of the spending is business-to-business, which is not part of GDP.

Lavorgna believes growth in the fourth quarter could clock in at 3%, pointing to a highly regarded reading on economic growth calculated by the Atlanta Fed.

“If that number is correct, that will put us at just a smidgen under 3% for the year, which is remarkable. So we could definitely do 3%-type GDP growth, maybe more [next year],” he said.

Jennifer Schonberger covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.