Advisor to Treasury Secretary Bessent talks growing the economy & why the Fed should cut rates

Key Concepts

• GDP Growth: Gross Domestic Product, a measure of the total value of goods and services produced in an economy.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Unemployment Rate: The percentage of the labor force that is jobless and actively seeking employment.
• Tariffs: Taxes imposed on imported goods.
• Productivity: The efficiency with which goods and services are produced.
• Tax Policies: Government actions related to taxation, including tax rates and deductions.
• Expensing of Factories: A tax provision allowing businesses to deduct the full cost of new factory equipment in the year it's placed in service.
• Energy Costs: The price of energy, which can impact production costs and inflation.
• Interest Rates: The cost of borrowing money, often influenced by central bank policy.
• Federal Funds Rate: The target rate set by the Federal Reserve for overnight lending between banks.
• 10-Year Treasury Yield: The interest rate on U.S. Treasury bonds with a 10-year maturity, a benchmark for many borrowing costs.
• Yield Curve: A graph showing the relationship between the interest rates and the time to maturity of debt from the same issuer.
• Fiscal Sanity/Fiscal House in Order: Refers to responsible government spending and debt management.
• Budget Deficits: When government spending exceeds government revenue.
• Revenues: Income generated by the government.
• Outlays: Government spending.
• Financial Stability Oversight Council (FSOC): A U.S. government body established to identify risks to U.S. financial stability.
• Regulation: Rules and laws governing economic activity.
• Credit Flow: The availability and ease of obtaining loans and other forms of credit.
• Capital Markets: Markets where financial securities are traded.
• Wage Rates: The amount of money paid to workers for their labor.
• Capital Spending: Investment by businesses in physical assets like machinery and buildings.

Economic Forecasts and Growth Projections

The discussion centers on the Federal Reserve's revised economic outlook for the upcoming year. The Fed has increased its GDP growth forecast to 2.3%. Fed Chair Powell anticipates that any price increases stemming from tariffs will peak in the first quarter, with inflation projected to fall to 2.5% next year. The unemployment rate is expected to remain stable at 4.4%.

Joe Leavia, counselor to Treasury Secretary Bessett, expresses a contrasting view, arguing that the Fed's forecast is "way too low." He highlights current economic performance, citing the Atlanta Fed's estimate of 3% growth, with 3.6% in the previous quarter and 3.8% in the second quarter. Leavia further asserts that when "wasteful government spending" is excluded, the economy grew by approximately 4.5% in the second quarter. He attributes this strong performance to productivity trends and tax policies, collectively termed "Trumpomics," which he believes should lead to much faster growth. Leavia contrasts this with President Trump's first term, where growth was "just under 3%" and nearly 3.5% immediately before the pandemic. He argues that current policies, including the expensing of factories and abundant energy leading to near 5-year lows in prices, should result in significantly better economic performance than the Fed's 2.3% projection. He is optimistic that inflation will decrease and the unemployment rate will drop further.

Interest Rate Policy and Treasury's Role

The conversation then shifts to interest rate policy and the potential impact of tax refunds. Leavia acknowledges Treasury Secretary Bessett's statement that tax refunds of $1,000 to $2,000 per household could stimulate demand. He questions the Fed's projection of only one rate cut for the next year, especially given President Trump's belief that rates should be lower and that the Fed should have implemented more significant cuts.

Leavia supports President Trump's "instinctive knowledge" of the economy, recalling that the President was correct in advocating for lower rates during his first term, which coincided with strong productivity and stable prices. He argues that current productivity is even stronger, and inflation rates are trending lower, justifying the President's "concerns and frustrations." Leavia suggests that financial market indicators, such as the slope of the yield curve, indicate that current monetary policy is "restrictive" and hindering the economy's potential. He contrasts the Fed's approach with the President's "real world" understanding.

Regarding the Treasury's role in influencing the 10-year Treasury yield, which affects borrowing rates like mortgages, Leavia points out that the difference between the Fed funds rate and the 10-year Treasury rate is narrow, and the Fed funds rate is considered high, even by Fed Chair Powell's admission. He emphasizes the Treasury's focus on "restoring fiscal sanity" by moving away from the "lunacy" of 6-12% budget deficits as a share of GDP during a full employment economy. Leavia highlights significant improvements in fiscal year 2025 and double-digit gains in revenues with continued declines in outlays in fiscal year 2026. He asserts that this fiscal discipline, coupled with less inflation, will lead to lower interest rates and mortgage rates, reversing the trend of high inflation and borrowing costs under the prior administration. He also notes that the U.S. bond market has been the best performing in the industrialized world.

Financial Stability and Regulatory Changes

The discussion concludes with a focus on proposed changes to the Financial Stability Oversight Council (FSOC). Treasury Secretary Bessett has proposed modifications to this body, which was established after the financial crisis. A key aspect of these changes involves unwinding "undue burdens" and regulations on the banking system.

Leavia defends these changes, stating that Secretary Bessett, with his extensive private sector experience, understands the importance of "prudent sound regulation" for maintaining confidence in the U.S. financial system and its capital markets. However, he emphasizes the need for credit to flow freely to the economy, particularly to small businesses, which are considered the "backbone of growth." Leavia views the Secretary's proposed changes as "prudent" measures to facilitate credit flow and remove obstacles that hinder the economy's full potential. The ultimate goal, he states, is to improve the economy for "everyday Americans" by increasing wage rates, accelerating growth, and diffusing capital spending throughout the system, which requires an effective lending mechanism.