US Economy: Tax Cuts Lead to Intensified Concerns about Fiscal Deterioration
2025-05-23
■ Although the economic downside risk posed by tariffs has decreased, concerns about fiscal deterioration due to tax cuts have emerged rapidly.
■ While recent price increases have been limited, the negative impact on the economy is gradually becoming evident.
The Federal Reserve expects to cut interest rates in the second half of this year. In the joint statement between China and the United States on the 12th, the US tariff rate on most Chinese-made products was reduced from 145% to 30% within 90 days. Consequently, the average US tariff rate has dropped to approximately 14%, reducing the risk of a sharp slowdown in the US economy. However, compared to 2.5% at the end of last year, the tariff level remains significantly higher, and this tariff policy still casts a shadow over the US economic outlook.
On the other hand, the tax cut bill, expected to stimulate the economy, is currently under review by the US Congress. Conservative hardliners are attempting to block the bill’s passage, and the Republican Party's efforts to push the substantial tax cut bill are progressing slowly. According to estimates from the Committee for a Responsible Federal Budget (CRFB), the budget may increase government debt by $3.5 trillion to $5.2 trillion over ten years, while the revenue generated by the tariff increase is only about $2.1 trillion to $2.7 trillion, making it difficult to cover the fiscal gap. Against this backdrop of concerns over fiscal deterioration, major rating agencies downgraded the US Treasury rating from the highest level on the 16th. As tax cut bill discussions and tariff negotiations proceed, the dynamics of the US fiscal deficit will continue to attract considerable attention.
Current economic indicators suggest that the impact of tariff increases on domestic inflation remains limited. The core consumer price index (excluding food and energy) rose 2.8% year-on-year in April and 0.2% month-on-month, which was lower than expected. Most companies are cautious about raising prices, indicating a suppression of corporate profits. As the cost of tariff increases is passed on, inflation is anticipated to rise in the coming months. Additionally, core retail sales (excluding automobiles, restaurants, building materials, and gasoline) fell 0.2% month-on-month in April, and manufacturing output declined 0.4% month-on-month, following strong growth in the previous month. This suggests that the rebound phase after the dissipation of prior demand may have begun.
The Federal Reserve is advancing its five-year-long-term monetary policy framework review in this context. Chairman Powell stated on the 15th that he is considering revising the "Flexible Average Inflation Target" (FAIT) and the "Measurement of the Gap from Full Employment" introduced in August 2020. FAIT aims to allow inflation to exceed the target for a time without immediately tightening policy when inflation is low. Such adjustments indicate that the loose bias of monetary policy will be weakened, possibly prompting the Fed to maintain a wait-and-see attitude when President Trump calls for a rate cut. However, this move does not represent a major policy shift. As the labor market deteriorates further in the year's second half, the Fed may be more inclined to implement a rate cut.
■ While recent price increases have been limited, the negative impact on the economy is gradually becoming evident.
The Federal Reserve expects to cut interest rates in the second half of this year. In the joint statement between China and the United States on the 12th, the US tariff rate on most Chinese-made products was reduced from 145% to 30% within 90 days. Consequently, the average US tariff rate has dropped to approximately 14%, reducing the risk of a sharp slowdown in the US economy. However, compared to 2.5% at the end of last year, the tariff level remains significantly higher, and this tariff policy still casts a shadow over the US economic outlook.
On the other hand, the tax cut bill, expected to stimulate the economy, is currently under review by the US Congress. Conservative hardliners are attempting to block the bill’s passage, and the Republican Party's efforts to push the substantial tax cut bill are progressing slowly. According to estimates from the Committee for a Responsible Federal Budget (CRFB), the budget may increase government debt by $3.5 trillion to $5.2 trillion over ten years, while the revenue generated by the tariff increase is only about $2.1 trillion to $2.7 trillion, making it difficult to cover the fiscal gap. Against this backdrop of concerns over fiscal deterioration, major rating agencies downgraded the US Treasury rating from the highest level on the 16th. As tax cut bill discussions and tariff negotiations proceed, the dynamics of the US fiscal deficit will continue to attract considerable attention.
Current economic indicators suggest that the impact of tariff increases on domestic inflation remains limited. The core consumer price index (excluding food and energy) rose 2.8% year-on-year in April and 0.2% month-on-month, which was lower than expected. Most companies are cautious about raising prices, indicating a suppression of corporate profits. As the cost of tariff increases is passed on, inflation is anticipated to rise in the coming months. Additionally, core retail sales (excluding automobiles, restaurants, building materials, and gasoline) fell 0.2% month-on-month in April, and manufacturing output declined 0.4% month-on-month, following strong growth in the previous month. This suggests that the rebound phase after the dissipation of prior demand may have begun.
The Federal Reserve is advancing its five-year-long-term monetary policy framework review in this context. Chairman Powell stated on the 15th that he is considering revising the "Flexible Average Inflation Target" (FAIT) and the "Measurement of the Gap from Full Employment" introduced in August 2020. FAIT aims to allow inflation to exceed the target for a time without immediately tightening policy when inflation is low. Such adjustments indicate that the loose bias of monetary policy will be weakened, possibly prompting the Fed to maintain a wait-and-see attitude when President Trump calls for a rate cut. However, this move does not represent a major policy shift. As the labor market deteriorates further in the year's second half, the Fed may be more inclined to implement a rate cut.