Fed Should Raise Rates in September, Says Former Treasury Economist Joe Lavorgna
SMBC’s chief economist argues the US economy no longer needs last year’s emergency cuts — and that a hike could actually calm the bond market.
Just when Wall Street had convinced itself that the Federal Reserve’s next move would be another cut, a prominent voice is making the case for the exact opposite. Joe Lavorgna, chief economist at SMBC and a former official at the US Treasury Department, said on CNBC that the central bank should — and will — raise interest rates at its September meeting. The comment cuts against the prevailing narrative that the Fed’s next policy shift will be dovish, and it has already sparked fresh debate among investors, economists, and traders who have spent much of the year trying to decode the central bank’s intentions. Lavorgna’s argument is not rooted in a hawkish ideology or a desire to slow the economy. Instead, he insists, it is a straightforward response to the data. In his view, the US economy has moved beyond the conditions that originally justified aggressive easing, and the Fed now risks falling behind the curve by keeping policy looser than it should be. With growth accelerating, manufacturing activity reviving, and real interest rates behaving erratically, Lavorgna believes the case for a September hike is not merely theoretical — it is practical, timely, and increasingly difficult to ignore.
Lavorgna’s reasoning rests on a simple but powerful observation: the US economy is no longer the fragile patient that required emergency care. He pointed to growth momentum that he estimates is tracking close to 5% in the third quarter, a pace that would be remarkable for an economy that many analysts had expected to cool under the weight of higher borrowing costs. The manufacturing sector, which spent much of the past year in contraction territory, has also shown signs of a genuine revival, with production and new orders picking up in ways that suggest the industrial slowdown may have been a temporary stumble rather than the beginning of a prolonged downturn. At the same time, real interest rates — the rates investors earn after accounting for inflation — have been unusually volatile, swinging sharply as markets struggle to reconcile strong growth with the Fed’s cautious posture. For Lavorgna, that volatility is a symptom of a deeper problem: the central bank’s policy rate is out of step with the economy’s actual trajectory. The 75 basis points of rate cuts the Fed delivered last year, which were framed as insurance against a weakening labor market, now look unnecessary. The labor market, while cooler than its post-pandemic peak, has not collapsed. Unemployment remains low, job creation continues, and wage growth, while moderating, is still consistent with a healthy economy. In that context, Lavorgna argues, maintaining those cuts is not prudent risk management — it is a policy error waiting to be corrected.
“I believe the Fed should and will raise interest rates in September,” Lavorgna said during his CNBC appearance. “Given the economic outlook and growth expectations, reversing the extra rate cuts made last year would be a logical step.” That statement is striking for its clarity, especially at a moment when Fed officials have been careful to avoid committing to any particular path. Most policymakers have framed their recent decisions as data-dependent, leaving the door open to cuts, hikes, or a prolonged pause. Lavorgna, by contrast, is willing to say what many investors are thinking but few are willing to state so bluntly: the economy is running too hot for the current level of policy restraint, and the Fed’s next move should be upward, not downward. The logic is straightforward. If the economy is growing at nearly 5%, if manufacturing is rebounding, and if inflation is no longer the existential threat it was a few years ago, then the emergency rate cuts of last year have served their purpose. Keeping them in place risks fueling excessive risk-taking, asset price bubbles, and a reacceleration of price pressures that could force the Fed into a more aggressive tightening cycle later. By acting now, Lavorgna argues, the Fed can normalize policy gradually and deliberately, rather than waiting until it is forced to play catch-up.
One of the most intriguing parts of Lavorgna’s argument is his answer to a question that has become unavoidable in Washington: how can the Fed raise rates when the White House is publicly pushing for lower borrowing costs? The political pressure on the central bank has been intense, with the President and his allies calling for easier monetary policy to support housing, manufacturing, and consumer spending. Lavorgna, however, believes a rate hike could actually be sold as a pro-growth policy — not in spite of its effects on short-term rates, but because of them. He argued that raising short-term interest rates would lower the risk premium embedded in financial markets, and that this, in turn, could bring down long-term bond yields. At first glance, that sounds counterintuitive. Conventional wisdom holds that higher policy rates push yields across the curve higher. But Lavorgna’s point is more nuanced. When the Fed raises rates, it signals confidence in the economy and a commitment to keeping inflation contained. That credibility reduces the compensation investors demand for holding long-term bonds, because the risk of a policy mistake — and the inflation surprise that would come with it — diminishes. If the term premium falls enough, the 10-year Treasury yield could actually decline even as the federal funds rate moves up. In other words, a hike at the short end could ease financial conditions at the long end, which is where most borrowing decisions for mortgages, corporate investment, and government debt are made.
Lavorgna also made a broader point about the benefits of higher short-term rates for everyday investors and savers. For years, the era of near-zero interest rates punished anyone who kept money in cash, certificates of deposit, or short-term Treasury bonds. Retirees, in particular, were forced into riskier assets just to generate income. A September rate hike would change that calculus. Higher short-term rates mean higher yields on deposits and short-dated government securities, giving savers a meaningful return without taking on equity market risk. Lavorgna argued that this dynamic would support the economy in the medium to long term, because stronger household balance sheets translate into more resilient consumption, greater financial security, and a more stable foundation for growth. It is a subtle but important reframing of the rate debate. Too often, rate hikes are described exclusively as a brake on economic activity. Lavorgna’s analysis suggests that, in the current environment, a modest increase in the policy rate could function more like a recalibration — a way to align the cost of money with the reality of a strong economy, while giving investors and consumers a fairer return on their savings. That is not a contractionary policy. It is a corrective one.
Whether the Fed will actually follow through remains an open question, and Lavorgna’s forecast is far from guaranteed. The central bank has its own internal dynamics, and the political environment around monetary policy has rarely been more complicated. But his argument has arrived at a moment when the consensus is unusually fragile. For months, markets have priced in a path of gradual easing, assuming that the Fed’s next move would be a cut. If the third-quarter growth data continues to come in near 5%, if manufacturing keeps improving, and if real rates remain volatile, that assumption will become increasingly difficult to defend. Lavorgna’s call is a reminder that the Fed is not bound by market expectations or political pressure. It is bound by its mandate and by the data. And if the data say the economy is strong enough to absorb a rate hike, then the most logical — and perhaps most responsible — move is to take back the insurance that was never needed. For now, investors should treat this as one economist’s view, not a certainty. As always, this is not investment advice. But in a world where the consensus has been wrong before, the argument deserves serious attention. If Lavorgna is right, September could mark one of the most unusual policy reversals in recent Fed history — a central bank raising rates just months after cutting them, not because the economy is overheating, but because it is finally strong enough to handle the truth.
