Commentary丨Is the Fed About to "Passively" Cut Interest Rates? (Part 2)

　　Furthermore, judging by the unemployment rate—a key metric the Fed heavily relies on—the latest figure for July stands at 4.2%, unchanged for three consecutive months. Compared to the peak of 14.8% in April 2020, it has dropped by 10.6 percentage points, with an overall stable trend. Historically, the current U.S. unemployment rate is roughly at the level seen between July 2017 and January 2019.

　　Interestingly, a deeper dive into historical data might help explain the White House's dissatisfaction with the Fed. Take the same period (July 2017–January 2019) as an example: the U.S. PCE ranged between 1.5% and 1.4%, while the federal funds rate was set at 1%~1.25% and 2.25%~2.5%, respectively. From the White House's perspective, now that the Fed has unveiled its monetary policy toolkit, the current PCE and unemployment metrics should be sufficient justification for the Fed to cut rates as soon as possible.

　　However, economic fundamentals remind us that price shocks are lagging. If the U.S. fails to reach a consensus on tariffs with its trade partners, the risk of inflation spiraling out of control cannot be entirely ruled out. Hence, the Fed's wait-and-see approach is understandable. After all, the biggest variable holding the Fed back from cutting rates is the uncertainty of how tariffs might impact U.S. prices—a scenario with historical precedents.

　　But the crux of the current issue lies in the paradox between the Fed's high interest rates and the U.S. government's soaring interest payments. U.S. national debt is now on the brink of a "technical default." Public estimates suggest that 30% of the federal government's revenue in FY2025 will go toward servicing debt interest, further widening the fiscal deficit. In this context, Elon Musk's warning last year that "the U.S. is racing toward bankruptcy at an unprecedented speed" may not be an exaggeration at all.

　　Especially after the passage of the "Big Beautiful Act," the U.S. government's debt ceiling has become virtually meaningless. The chain reaction triggered by the government's "throwing caution to the wind" could continue to escalate. Global markets are growing increasingly uneasy about the sustainability of U.S. debt repayments and fiscal revenue, as evidenced by the repeated sell-offs of the 10-year Treasury bond—dubbed the "anchor of global asset pricing"—since April.

　　Under these circumstances, a short-term rate cut to ease the interest payment burden on U.S. debt, coupled with continued monitoring of tariffs' impact on prices, might be the greatest common denominator between the White House and the Fed. But with the Fed's independence eroding, the visibility of U.S. monetary policy will inevitably decline further.