Senior central bank reporter: The reasons for the Federal Reserve to cut interest rates are increasing

As Trump frequently pressures the Federal Reserve to cut interest rates, the latest economic data from the United States shows that inflationary pressures are easing more than expected, while the labor market may be deteriorating. Senior central bank reporter for The Wall Street Journal believes these factors collectively strengthen the case for the Federal Reserve to lower interest rates.

According to a previous article from Wall Street Insight, on Thursday, Trump intensified his pressure on the Federal Reserve, using unprecedentedly harsh language. He directly called Powell an "idiot" and threw out a figure: a two-percentage-point rate cut could save the U.S. $600 billion in interest expenses annually.

On the same day, Greg Ip, a senior central bank reporter for The Wall Street Journal, stated in his latest article that although the tariff policies implemented by the Trump administration have created a dilemma for the Federal Reserve, the latest economic data shows that the impact of tariffs on inflation has not been as significant as expected, while cracks are appearing in the labor market, indicating a subtle but crucial shift in the risk balance faced by the Federal Reserve—from worrying about rising inflation to focusing on weak economic demand.

Ip believes that while the Federal Reserve does not need to take immediate action at next week's meeting, policymakers need to acknowledge that the risks are shifting in their forward guidance and statements. Current interest rates remain 0.5-1.5 percentage points above what Federal Reserve officials consider the "neutral" level, and this restrictive stance is only reasonable when inflation is the sole concern.

Tariffs Have Not Increased Inflation

In his article, Ip noted that the latest data reveals a puzzling phenomenon: the tariff revenue collected by the U.S. Treasury in May increased by about $15 billion compared to February, equivalent to 3% of total consumer spending on goods, yet consumer prices did not rise accordingly. Even more surprisingly, prices for clearly targeted tariff items like clothing and new cars actually decreased in May.

This raises a key question: If consumers are not bearing the cost of tariffs, then who is footing the bill? The data suggests it is not foreign producers—import prices excluding fuel continued to rise in April. According to the producer price report released on Thursday, the profit margins of retailers and wholesalers were impacted in April but rebounded in May, indicating they are not absorbing the costs either.

Ip stated that perhaps the data fails to capture some ways companies are responding to tariffs, such as keeping prices stable but increasing shipping costs. In any case, the resilience of supply chains is far greater than it was a few years ago, which should provide some comfort to the Federal Reserve.

Ip wrote that while economists believe the effects of tariffs will become more apparent in the coming months, this alone is not sufficient reason for the Federal Reserve to remain on the sidelines. Tariffs are merely a one-time push to price levels, meaning that a year later, inflation should revert to the trend seen before the tariffs. The key question is whether tariffs will elevate this trend.

The good news is that there have been positive changes in service sector inflation. Ip cited independent forecasting expert Omair Sharif as saying, "Many of our expectations regarding housing costs have already been realized." Housing costs have long been a stubborn factor hindering inflation from returning to the Federal Reserve's 2% target, but this situation is changing Data shows that the inflation rate of the U.S. service sector, excluding energy, fell from 4.5% in December to 3.5% in May, which in turn drove the core inflation rate (excluding food and energy) to a four-year low of 2.8% over the past three months. According to the personal consumption expenditure price index preferred by the Federal Reserve, the inflation rate is also close to its lowest level since the pandemic, possibly between 2.5% and 2.6% in May, with an annualized growth rate of about 1.3% over the past three months.

Ip believes that without tariff factors, the Federal Reserve may announce mission accomplished by the end of the year.

Employment Market Shows Vulnerability

Ip stated that the underlying trend indicates that the Federal Reserve should ease its policy:

Now, assuming tariffs do indeed push up core inflation in the coming months, the key to pushing up the underlying trend depends on the state of the labor market. The reason inflation was so persistent during the pandemic was that workers were extremely scarce, demand was strong, and people left the labor market due to the pandemic or retirement. Wage inflation soared from 3.5% before the pandemic to 7%.

Ip particularly emphasized that today's labor market is not tight but shows signs of cracks. He pointed out that the unemployment rate has been rising every month since January, totaling an increase of 0.25 percentage points. At this rate, it will reach 4.6% in the fourth quarter. This indicates that economic growth is slightly below potential levels, which should suppress price and wage pressures.

For months, hiring and layoffs in the U.S. have been at low levels, keeping the unemployment rate low. However, new unemployment insurance claims surged in the past two weeks, suggesting that layoffs—excluding the federal government—are increasing.

Although the addition of 139,000 jobs in May seems healthy, Ip warned that this could be a "false signal." From January to April, the initially reported strong employment growth data by the Bureau of Labor Statistics was later significantly revised downward. RBC Capital Markets noted that such consecutive negative revisions are common on the eve of an economic recession.

At the end of the article, Ip pointed out that although the situation is not as imbalanced as it was in September last year, current interest rates are still 0.5 to 1.5 percentage points higher than what the Federal Reserve considers a "neutral" level:

"As long as inflation is the only concern for the Federal Reserve, this tightening stance makes sense. But that is no longer the case now."