MACRO OUTLOOK: MNI US Macro Weekly: Staying Calm, Carrying On

Net interest expense is currently running at just under $1T annually on a 12-month rolling basis. May's interest payment of $86.0B was a 4-month low, but that still dwarfs an all-time high $22B in customs revenue in May. That illustrates a major structural fiscal issue that's only likely to be relieved by lower real Treasury yields.

• As a percentage of GDP, net interest payments now total around 3.2% on a 12-month rolling basis, an all-time high; as a percentage of expenditure, it's 13.3%. At the recent bottom in March 2021, those figures were 1.4% and 4.1%, respectively.
• The effective tariff rate was around 5-6% in April ($16B taxes on $278B of goods imports), so very limited - it appears closer to 8-10% in May assuming same level of goods imports...getting up to double-digits). That's expected to rise to about 15% effective under the current configuration of tariffs, so closer to $25-30/month at current import levels, or ~$300-350B/year.
• However, the baseline of imports is set to contract as importers react, reducing annual income to closer to $250B - or, roughly 25% of interest payments, which continue to rise.

In the inter-meeting period, FOMC participants were also seen:

• Highlighting policy uncertainty, particularly on tariffs, as a reason to wait until later in the year before deciding on any policy moves. Multiple Committee members (eg Waller, Williams) suggested that it would be several months at least until there was sufficient clarity to decide.
• Maintaining the overall easing bias, though with some (eg Harker, Cook) hinting that potentially the “direction” of policy was uncertain given the elevated degree of uncertainty. Hammack said in an interview didn’t rule out rate hikes in the event inflation / expectations were to pick up sharply.
• Reiterating the March rate Dot Plot – at least for those whose preferences were clearly stated (Daly still sees 2 cuts in 2025 as in March; Bostic 1). Others appeared to be pushing back their rate cut views from pre-Liberation Day, including Goolsbee.
• Debating the “transitory” nature of tariffs. Gov Waller – the Committee’s biggest dove at this point – argued that tariffs would have a one-off impact on inflation and if so, rate cuts could resume later in the year. Others were much more cautious on this point, including 2025 voters Goolsbee (dove) and Schmid (a hawk who said: "While theory might suggest that monetary policy should look through a one-time increase in prices, I would be uncomfortable staking the Fed's reputation and credibility on theory.”) We note that the May Minutes showed hawkishly that "Almost all participants commented on the risk that inflation could prove to be more persistent than expected".
• Indicating that the May 12 US-China trade de-escalation had only a slightly positive bearing on inflation and growth outlooks, with the overall tariff regime considered to be much more onerous than had been expected at the March FOMC (the most recent projection meeting).

From our Key Inter-Meeting Fed Speak publication (PDF Here): While Chair Powell didn’t make any commentary on current monetary policy in the inter-meeting period, his FOMC colleagues provided plenty. And almost all repeated the same language to varying degrees to make the point that the Committee could and should be patient in its upcoming rate decisions:

• Identifying inflation as the more salient dual-mandate risk in the current environment, with underlying economic activity and the labor market remaining solid in the “hard” data, but the impact of tariffs likely to be seen over the course of the summer in inflation reports (thereby downplaying recent encouraging disinflation, including, likely, the May CPI report). While longer-run inflation expectations were seen as still being anchored, almost all FOMC participants expressed concerns that this could change.
• Describing current policy as “in a good place”, and “restrictive” at some level, ie “slightly” / “modestly”, echoing Powell’s previous commentary.