Treasury says Fed could still cut rates next year despite robust growth

A senior Treasury official told reporters that the Federal Reserve could plausibly begin lowering interest rates next year even if the U.S. economy continues to expand at a healthy pace. The official argued that a confluence of factors — including easing inflation readings, labor market normalization and resilient but sustainable growth — could give the Fed room to pivot from its current restrictive stance without risking a resurgence in price pressures.

The remarks underscore a growing debate among policymakers and market participants about the timing and drivers of any future easing cycle. Investors have increasingly priced in the possibility of rate cuts if inflation heads decisively back toward the Fed’s 2% target. Treasury officials emphasized that monetary policy decisions are ultimately the Fed’s responsibility, but noted that improving inflation dynamics would change the policy calculus even amid solid GDP reports.

Analysts say such a shift would reflect confidence that inflation is on a durable downward path rather than a short-lived moderation. For bond markets, the implication is significant: expectations for lower terminal rates tend to lower yields across the curve, potentially easing borrowing costs for businesses and households. However, Treasury sources cautioned that a rate-cut narrative depends on data — especially inflation metrics, wage growth and employment trends — and that officials remain attentive to upside risks.

Market strategists also flagged potential trade-offs. Cutting rates while growth is strong could risk overheating if underlying supply constraints or wage pressures reassert. Conversely, acting too late could prolong a restrictive stance that slows hiring and investment. The Treasury’s comments arrive as investors digest recent economic releases and Fed communications, weighing whether robust activity necessarily precludes easier policy.

In sum, the Treasury’s view adds nuance to the conversation: strong growth does not automatically eliminate the possibility of rate cuts next year, but any easing would hinge on consistent progress toward inflation objectives and careful Fed assessment of risks to price stability.