Treasury’s LaVorgna Flags 2026 Growth Boost From Tax Measures, Minimal Tariff Inflation—Rates and Dollar in Focus
A senior Treasury official told Reuters the U.S. economy could see a firmer growth pulse into 2026, underpinned by pro-investment tax measures and a turning capital-expenditure cycle. Traders are weighing the prospect of stronger supply-side momentum against the path of Federal Reserve easing, with implications for Treasuries, the dollar and equities.
Key points
- Treasury’s LaVorgna expects stronger U.S. growth in 2026 as investment incentives tied to the Trump-era tax framework filter through.
- Capex cycle seen inflecting higher; rules enabling full expensing for factories are expected by year-end, supporting equipment and structures spending.
- Views tariffs as having de minimis inflation impact next year, saying cost pressures are concentrated in services and tariffs are being absorbed in margins.
- Says monetary policy remains too restrictive; argues ultra-long mortgages wouldn’t be necessary if policy rates fell.
- Notes Q3 GDP appears near 4% annualized; sees productivity and AI as complementary to labor rather than substitutive.
- $2,000 tariff rebate proposal to households would require congressional approval and is uncertain; may be unnecessary if growth strengthens.
- Administration maintains a supply-side policy tilt; timing of a Fed appointment decision remains unclear.
Policy outlook and macro mix
LaVorgna signaled confidence that a pro-investment policy package—centered on full expensing and geared toward manufacturing—can sustain above-trend activity into 2026. He contrasted the current supply-side tilt with demand-focused approaches, arguing affordability pressures remain a priority for the administration.
He said capital spending is already showing early signs of re-acceleration, a potential tailwind for productivity and potential growth. If realized, that would extend the current expansion while helping cool unit labor costs—key for the Fed’s inflation fight.
Tariffs, inflation and the Fed
LaVorgna downplayed the inflationary impact of tariffs, suggesting much of the burden is being absorbed in corporate margins and that the dominant inflation challenge remains services. He expects only minimal tariff-related inflation next year, an assessment that, if borne out, would support a gradual Fed easing cycle.
He described policy rates as still restrictive and implied that lower borrowing costs would be more constructive for housing than engineering longer-duration mortgages. Markets will parse these remarks as a call for monetary support alongside fiscal supply-side measures.
Market implications: USD, yields, equities
– Treasuries: A capex-led growth impulse and full expensing could nudge long-end yields higher on improved real growth expectations, even as softer tariff pass-through anchors breakevens. The curve could re-steepen if the Fed cuts while term premia edge up on stronger potential growth.
– FX: A growth-divergence narrative that favors U.S. productivity could be dollar-supportive, particularly versus low-yielders, unless the Fed eases more aggressively than peers.
– Equities: Pro-investment policy and productivity gains tend to favor industrials, capital goods, semis and cash-flow-rich cyclicals. However, persistently firm real yields would keep pressure on duration-sensitive growth stocks.
– Credit: Improving capex and margins absorption could be constructive for IG spreads; HY remains sensitive to the pace of Fed cuts and the strength of earnings.
What to watch
– Finalization of full-expensing rules and any accompanying guidance.
– Incoming inflation and wage data to validate “services-led” inflation and limited tariff pass-through.
– Corporate capex indicators (ISM manufacturing, durable goods, earnings guidance) for confirmation of an upturn.
– Signals on the timing of a Fed appointment, which could influence rate expectations and term premia.
– Any movement on a proposed $2,000 household rebate, which would require congressional action and could alter the fiscal impulse.
Analysis
If the capex cycle is indeed turning and expensing rules arrive on schedule, the investment-led growth mix would mark a notable shift from consumption-heavy dynamics. That could lift the economy’s supply potential and cool inflation over time, a constructive backdrop for risk assets. The near-term tug-of-war for markets is whether stronger growth keeps long yields elevated even as the Fed eases—an outcome that would be mildly dollar-positive and supportive for cyclicals.
As always, execution risk is material: rulemaking timelines, congressional dynamics around any rebate, and the trajectory of services inflation will determine how much of this narrative prices into rates and FX. For traders, the setup argues for monitoring real-yield momentum, the 2s10s curve, and cyclical currency pairs most sensitive to U.S. growth and policy spreads, BPayNews analysis suggests.
FAQ
Who is LaVorgna and why do markets care about his comments?
LaVorgna is a senior Treasury official who spoke to Reuters about the administration’s economic priorities. His remarks offer insight into the policy mix that could shape growth, inflation and the path of interest rates—key drivers for Treasuries, the dollar and equities.
What is full expensing and how does it affect markets?
Full expensing allows businesses to immediately deduct the cost of certain investments, such as equipment and factory buildouts. It tends to pull forward capex, supporting industrial activity, productivity and earnings. Markets often read it as bullish for cyclicals and potentially steepening for the yield curve.
Will tariffs push inflation higher next year?
LaVorgna expects only a minimal inflation impact, saying tariffs are being absorbed in margins and that services remain the larger inflation driver. If correct, this would reduce pressure on the Fed to stay restrictive and support a measured easing cycle.
How could this outlook move the U.S. dollar?
A stronger supply-side growth narrative and rising real yields could lend the dollar support, especially versus lower-yielding peers. The impact would be tempered if the Fed cuts more quickly than other central banks.
Is a $2,000 household rebate likely?
It would require congressional approval and is uncertain. LaVorgna suggested it might not be necessary if growth strengthens as expected.
What does this mean for mortgage markets and housing?
He argued that lower policy rates would be more helpful for affordability than introducing ultra-long mortgages. If the Fed cuts and long-end yields ease, housing activity could benefit.
What should traders monitor next?
Rule finalization on expensing, services inflation prints, capex surveys, Treasury refunding details, and any updates on the timing of a Fed appointment—all of which can sway rate expectations and FX positioning.
