MNI INTERVIEW: Ex-Trump Economist-Fed Will Mistakenly Pause

MNI (WASHINGTON) - The Federal Reserve could take a prolonged break from its interest cutting cycle starting early next year as officials mistakenly expect President-Elect Donald Trump’s policies to boost inflation, Joe Lavorgna, a former White House economist under the ex-president, told MNI. 

Lavorgna thinks the Fed will first skip another cut at the December meeting before reducing rates a couple more times in the first quarter of next year in the face of continued disinflation and hints of weakness in the job market. But the real pause will come toward the end of Trump's first 100 days, as the initial implementation of his policy proposals take shape.

“I don’t expect a move in December. I do expect them to be cutting again in the first quarter. Whenever the fiscal package is finalized, that’s when I think the Fed stops to wait and see how things shake out,” said Lavorgna, who served as Special Assistant to the President and Chief Economist of the National Economic Council during Trump’s first term. 

“The labor market is generally pretty soft, so I think they can rationalize more cuts next year. But then as the policy is actually put in place, the Fed can then get more publicly worried about what it thinks are the inflation effects.” (See MNI INTERVIEW: Fed Laying Groundwork For Rate Cut Pause-Lacker)

PAUSING TOO SOON

Lavorgna thinks the Fed will be making an error by pausing rate cuts at around 4%. He thinks the neutral rate is actually much lower than many market participants believe, and thus that policy is still quite restrictive and putting downward pressure on growth. 

“Ultimately, I see rates going much lower. The market now kind of thinks the Fed is going to stop somewhere in the high twos. I think it’s lower than that,” he said. 

He sees tariffs as a one-time shock to the price level, with any boost to inflationary pressures offset by ramped-up energy production and a productivity-enhancing shift toward private-sector investment.

“Tariffs are a one-off price level adjustment. We’ve got a strong dollar that’s going to offset some of the inflation impact,” he said. 

FISCAL POLICY

Expansionary fiscal policy is not necessarily inflationary if it bolsters the economy’s potential, he said.

“If it’s stimulus checks backed up by government issuing debt then yes. But if we’re talking about tax cuts that encourage more work and investment, more capital formation, that’s not inflationary,” said Lavorgna, currently chief economist at SMBC-Nikko Securities.

Lavorgna is also doubtful that immigration restrictions will be inflationary because he doesn’t buy the idea that the recent surge is responsible for bringing inflation down.

“I think this immigration story, how much it’s actually lifted employment, is overplayed. Labor force participation is below where it was before Covid and the people that are coming in illegally are not being counted in the unemployment survey,” he said. “It also presupposes that inflation is driven by wages, which I never believed to be the case."