MNI INTERVIEW: Treasury’s Lavorgna Sees 3% Growth Into 2026

The U.S. economy is on the verge of an investment boom that will lead to sustained GDP growth of around 3% into next year, although Federal Reserve interest rates must come down further so as not to stifle the outlook, Joseph Lavorgna, counselor to the U.S. Treasury secretary, told MNI. 

“Something around 3% next year is very doable,” he said in an interview. “It does look like the rebound you saw in Q2 is sustaining itself into Q3 with growth up at a nearly 4% rate. You are seeing recovery and consumer spending, and you're seeing very good capital spending. We’re on the cusp of a capex boom."

At the same time, what he described as overly restrictive monetary policy could undermine these rosy growth prospects if not unwound in due time, he said. 

“It does need an interest rate that is not restrictive," he said. "You have a garden, you've got great soil, you've got good seed, you've got the sunlight coming down, you've got a great gardener attending to the ecosystem. But if you don't have the water, you don't have liquidity, you're not going to grow." 

“That's how I straddle the idea that the economy is good right now, but it's not going to stay good if monetary policy is acting as a headwind to growth," Lavorgna said. 

SOME WAYS FROM NEUTRAL

By the Fed’s own estimates, the current level of interest rates is still about a full percentage point away from neutral even with last week’s quarter point rate cut, Lavorgna noted.

Concerns over tariff-related inflation, which have kept the Fed from cutting rates more, appear thus far unfounded.  

“The fact that we're still as economists debating what, if any, tariff effect is in the data, I think, already has led the 'tariffs-are-not-inflationary' camp to be proven correct, because we were told months ago that there'd be inflation and it hasn't happened,” he said. (See MNI POLICY: Fed Takes Measured Approach To Post-Sept Cuts)

FED REFORM

Lavorgna, who spent most of his career on Wall Street and served in President Donald Trump’s first administration as special assistant to the president and chief economist of the National Economic Council, pushed back on the idea that the White House is attacking Fed independence. 

Instead, he echoed Treasury Secretary Scott Bessent’s argument that the Fed itself became politicized through actions like the vast expansion of its balance sheet as well as wading into areas like climate change that were outside of the traditional remit of a central bank. 

“There certainly has been mission creep in terms of the research that the Fed and the various banks are producing, and I think that's become a real problem,” Lavorgna said. 

Trump has a clear agenda for reforming the Fed that includes a review of the scope of its decisions, which is why Treasury has recommended an internal review. 

“I'm certainly of the view that whoever is ultimately put on the Board and any other governors that are there, whether Stephen (Miran) stays on beyond January and if anybody else leaves, they're certainly going to buy into what the secretary has laid out,” he said. (See MNI INTERVIEW: US Jobs, Growth Poised For Rebound-Miran)

Lavorgna noted that the U.S. bond market is still performing better than its global peers, despite concerns over political interference with the Fed's affairs. "The markets are telling you there’s no problem with Fed independence."