A U.S. Treasury official said on Tuesday that the U.S. economy is expected to grow at a rate of 3%, and in such an environment, the Federal Reserve can continue to cut interest rates.
Investors are pondering whether stronger-than-expected GDP data for the third quarter in the U.S. will prevent the Federal Reserve from cutting interest rates next year.
A U.S. Treasury official said on Tuesday that the U.S. economy is expected to grow at a rate of 3%, and in such an environment, the Federal Reserve can continue to cut interest rates.
Joe Lavorgna, an advisor to U.S. Treasury Secretary Bessent, stated in an interview that, thanks to President Trump’s deregulatory and growth-promoting policies as well as increased capital expenditure, the U.S. economy is experiencing a phase of “prosperity without inflation.”
Lavorgna noted that if the economy continues to grow at a rate of 3% next year, driven by expansion on the supply side, this would imply a decline in inflation. He emphasized that if the real interest rate, adjusted for inflation, remains unchanged, then falling inflation would mean that interest rates could impose a stronger drag on the economy.
“Therefore, the Federal Reserve can continue to lower interest rates,” Lavorgna said. “The Fed should reduce rates based on its own estimate of the neutral rate while also recognizing that economic activities highly sensitive to interest rates remain unusually weak, and monetary policy has the greatest impact on these areas.”
Earlier this month, the Federal Reserve announced a 25-basis-point rate cut, lowering the target range for the federal funds rate to 3.5%—3.75%.
At the same time, policymakers have also signaled a potential pause in rate cuts. Fed officials currently only expect one rate cut throughout next year, with divisions within the committee on how to bring inflation back to the 2% target.
Investors are pondering whether stronger-than-expected GDP data for the third quarter in the U.S. will prevent the Federal Reserve from cutting interest rates next year.
Data shows that the annualized growth rate of U.S. GDP in the third quarter reached 4.3%. Consumer spending, which accounts for approximately 70% of economic growth, grew by 3.5%, exports surged significantly, and trade contributed 1.6 percentage points to GDP.
Although overall GDP performance was strong in the third quarter, business investment growth slowed to 2.8%, with equipment investment growth declining to 5.4%. Despite the ongoing data center investment boom, non-residential construction investment contracted at an annualized rate of 6.3%.
Lavorgna believes that the weakness in construction investment is due to the Federal Reserve keeping interest rates too high.
"If interest rates decline, combined with our expensing policy for factory investments, we will build more projects next year," he said. "This will create high-paying construction jobs, and significant capital will flow into these newly constructed buildings that qualify for full expensing. Of course, these jobs will attract workers because manufacturing wages are above average."
Lavorgna also pointed out that people overestimate the impact of artificial intelligence on GDP data, as a significant portion of the spending falls under business-to-business (B2B) transactions, which are not directly counted in GDP.
Citing widely recognized growth estimates from the Atlanta Fed, he suggested that fourth-quarter growth could reach 3%.
"If this figure is correct, then the annual GDP growth for this year will be slightly below 3%, which is already quite remarkable," Lavorgna said. "Therefore, achieving GDP growth of around 3% next year is entirely possible, and it may even be higher."
Editor/melody