Commentary丨Is the Federal Reserve About to "Passively" Cut Interest Rates? (Part 1)

With the release of the latest U.S. inflation data for July and the escalating standoff between the White House and the Federal Reserve, global markets are closely betting on the possibility of the Fed restarting interest rate cuts during its mid-September policy meeting.

A growing body of evidence suggests that the Federal Reserve may, under pressure from the White House, implement a small rate cut in September. The reasoning is as follows: First, current U.S. economic data does not yet provide a foundation for large-scale rate cuts. According to the latest inflation figures released by the U.S. Labor Department, the Consumer Price Index (CPI) rose by 2.7% year-on-year in July, with the core CPI increasing by 3.1%. Month-on-month, the two indices grew by 0.2% and 0.3%, respectively. While the overall trend remains stable, there is still a noticeable gap from the Fed's 2% inflation target.

As is well known, in addition to maintaining price stability, the Federal Reserve is also tasked with promoting maximum employment. As the Fed itself has stated, "Federal Reserve policymakers closely monitor inflation and adjust monetary policy to help steer inflation toward its target while continuing to advance the goal of maximum employment." It is clear that, in terms of policy priorities, price stability takes precedence, with the Fed aiming to achieve maximum employment through stable prices.

However, it is important to emphasize that when assessing changes in price levels, the Federal Reserve pays closer attention to the Personal Consumption Expenditures (PCE) Price Index. According to the Fed, while the PCE is similar in composition to the CPI, its methodology better captures how Americans spend their money at a given time and adapts more quickly to changes in spending patterns for goods and services.

The PCE data, released by the Bureau of Economic Analysis (BEA) under the U.S. Department of Commerce, showed a June reading of 2.6%, up from 2.4% in the previous month and 2.2% before that. From this perspective, the Fed's decision on July 30 to keep interest rates unchanged for the fifth consecutive time was well justified. After all, as the world's largest consumer, the ongoing impact of the U.S. government's tariff policies on the prices of imported goods and services continues to unfold. Maintaining high interest rates not only provides a buffer for the Fed's monetary policy adjustments but also encourages the repatriation of global capital to the U.S., which clearly supports economic growth.

This "open strategy" by the Federal Reserve has indeed yielded positive results. According to the same BEA data, U.S. GDP growth in 2025 reached 3.0% year-on-year, a complete reversal from the -0.5% decline in Q1 of this year and 0.6 percentage points higher than Q4 of last year. It also far exceeds the World Bank's latest forecast of 1.2% growth for advanced economies globally in 2025.