President Donald Trump’s top economic adviser said he hoped the Federal Reserve would raise interest rates “very slowly,” breaking with a 25-year White House precedent of generally refraining from commenting on monetary policy.
Lawrence Kudlow, the director of the National Economic Council, made the comments Friday morning during an interview on the Fox Business Network in which he extolled the impact of the tax cuts enacted six months ago.
“My hope is that the Fed under its new management understands that more people working and faster economic growth do not cause inflation—do not cause inflation,” he said, referring to the central bank’s new chairman, Jerome Powell, who was nominated by Mr. Trump and took office in February. “My hope is they understand that, and they will move very slowly.”
Mr. Kudlow said he speaks periodically to Mr. Powell, adding, “He’s a good man.”
Mr. Kudlow also said he expected the tax-overhaul legislation would raise economic growth and federal revenues to offset lower receipts from the rate cuts.
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The U.S. government’s budget deficit “is coming down. And it’s coming down rapidly. Growth solves a lot of problems,” he said.
There is no evidence that growth is outpacing government debt. In May, the deficit rose to its highest level in 5½ years, reaching 3.8% of gross domestic product, or $765 billion, over the prior 12-month period. That was up from a deficit of $611 billion, or 3.2% of GDP, in May 2017.
The tax cuts won’t generate enough growth to pay for themselves and will add about $1 trillion to budget deficits over a decade, according to official estimates from the congressional Joint Committee on Taxation.
In an interview later Friday with The Wall Street Journal, Mr. Kudlow said his comment about the deficit was his own forecast about what he believed would happen in the next two years. Growth is “going to be significantly faster than virtually any forecasters think,” he said.
Mr. Kudlow’s predecessor, Gary Cohn, pointedly refrained from commenting on monetary policy during his 14 months as NEC director, following a precedent set during the Clinton administration and followed by subsequent Republican and Democratic presidents and their advisers.
The Fed declined to comment on Mr. Kudlow’s comments Friday. In a speech last month, Mr. Powell said central bankers have been fortunate to enjoy relative independence from political pressures but low levels of trust in government institutions have created a “challenging moment” for central banking.
“In this environment, central banks cannot take our measure of independence for granted,” he said.
Central bankers say such independence allows them to make unpopular decisions in the economy’s long-run best interest, such as raising rates to curb inflation even if it means slowing growth, as then-Fed Chairman Paul Volcker did in the early 1980s.
The Fed has raised its benchmark short-term rate twice this year, most recently in June to a range between 1.75% and 2%, and officials have penciled in two more increases this year and three next year.
Officials say they want to make sure strong economic growth doesn’t give way to asset bubbles or excessive inflation, and they see gradual rate increases as the best insurance policy.
Inflation data released Friday likely bolstered their plans. Consumer prices rose in May at their fastest annual rate in six years, the Commerce Department said. The personal-consumption-expenditures price index, the Fed’s preferred inflation gauge, rose 2.3% last month from a year earlier.
Excluding volatile food and energy categories, so-called core inflation rose 2% in May, the first time it has reached that level since April 2012. The Fed watches core PCE inflation closely as an indicator of longer-run inflation trends.
The Fed seeks to keep inflation at 2% because it views that level as consistent with an economy with healthy demand for goods and services. In recent months, officials have gone to considerable lengths to clarify that their target isn’t a ceiling and that, instead, they are comfortable with inflation rising temporarily above that goal.
Mr. Kudlow’s comments Friday are the clearest indication yet of how a dispute over assumptions about the economy’s long-run growth rate could lead to a collision between the central bank and the White House if inflation pressures build and the Fed pushes rates higher.
Mr. Kudlow said recent economic data point show the tax cuts are already increasing the supply-side of the economy.
“We’re expanding the economy’s potential to grow. That’s the new equipment. That’s the new structures. That’s the new technology that we’re doing,” said Mr. Kudlow. “That cannot be inflationary. Don’t tell somebody in the Rust Belt, don’t tell somebody in the middle of the country that working and growing is a bad idea.”
Fed officials say they see more uncertainty in the inflation outlook because the unemployment rate is falling to levels not seen in 50 years.
They expect the tax cuts and a separate federal funding increase to juice economic growth this year and next. But they don’t share the Trump administration’s view that the growth increase will be sustained after next year, and some officials have said recent increases in business investment may instead reflect a rebound in the energy sector as rising oil prices spur new drilling activity.
Mr. Powell has said he sees some potential for the tax cuts to raise the productive capacity of the economy. This would allow the economy to grow faster without overheating, and could let the Fed stick to its gradual path of rate increases or possibly lead to a slower pace. But it also could cause the Fed to raise its benchmark rate higher than otherwise.
“You have a lot of uncertainty around what the effects will be,” Mr. Powell said at a news conference last month. “They could be large. We hope they’re large. But our approach is going to be to watch and see and hope that, in fact, we do get significant effects.”
While Fed officials have revised their economic-growth projections in the short run, they don’t see the fiscal-policy changes raising the long-run annual growth rate of the economy, which they expect is 1.8%.
Mr. Cohn has been more reserved than Mr. Kudlow in predicting an immediate growth boost from the tax cuts, suggesting it can take years for investments in new factories, equipment and other productivity-enhancing measures to filter into the economy.
“When you look at corporations and you look at investment of capital, if you want to go out and build a big factory tomorrow, you can’t decide on Friday to build a factory on Monday. It’s not the way it works,” Mr. Cohn said at an event hosted by the Washington Post earlier this month.
Mr. Cohn said companies are just beginning to implement new five- and 10-year spending plans. “You won’t see this money enter the economy and this job creation” until “maybe next quarter, the second half of this year—and that would be extraordinarily fast,” he said.
Write to Nick Timiraos at nick.timiraos@wsj.com