【MACRO Alert】 Tariffs strangle inflation VS immigration tears apart employment - the US economy is t

As the Trump administration's tariff policy and immigration restrictions are affecting the U.S. economy at the same time, a set of seemingly contradictory data is causing the market to think deeply about the true health of the economy.

1. Tariffs push up inflationary pressure: core commodities become the transmission “barometer”

The May CPI data, which will be released on Wednesday, June 11, Beijing time, is regarded by economists as a key node to test the economic impact of tariff policies. It is predicted that the year-on-year increase in CPI in May may rise to 2.5%, and the year-on-year increase in core CPI may reach 2.9%, both of which are larger than that in April. The core driving force of this rebound comes from the price transmission of the new round of tariffs launched by Trump in April to the consumer end.

However, the structural contradiction of inflationary pressure still exists: service sector inflation continues to reflect stable consumer demand, while fluctuations in the commodity sector are more susceptible to policy shocks. Interactive Brokers senior economist Jose Torres pointed out that although commodity prices may rebound periodically, the US economic structure tilted toward the service industry (the proportion of commodities in GDP has declined) will buffer the overall impact of trade frictions. The PCE inflation level of 2.1% in April is still close to the Fed's target, suggesting that overall inflation has not yet gotten out of control.

2. Immigration restrictions distort the job market: “false tension” masks real slowdown

The inflation data also sparked controversy because of the “contradictory signals” from the job market in May: nonfarm payrolls increased by 139,000, the unemployment rate remained at a low of 4.2%, but total employment decreased by 696,000, the largest monthly decline since 2020. Economists generally believe that the Trump administration's immigration policy is the driving force behind the decline - when the labor supply shrinks due to a decrease in the influx of immigrants, the market's “break-even” job growth value (the number of new jobs needed to maintain a stable unemployment rate) is accelerating.

“The unemployment rate may remain low, but for the wrong reasons.” Ryan Sweet, chief economist at Oxford Economics, pointed out that the reduction in labor supply caused by immigration restrictions is causing the market to misread the true tightness of the labor market. Although Federal Reserve Chairman Powell emphasized that the labor market is “solid”, policymakers have realized that they need to use a “huge indicator system” to penetrate the data fog. The nonpartisan Congressional Budget Office originally predicted 2 million net immigrants in 2025, but under Trump's stricter policies, Morgan Stanley has significantly lowered it to 800,000, and may only be 500,000 next year, which means that future non-agricultural employment growth may be below 100,000 for a long time.

3. The Feds Double Dilemma: Policy Trade-offs Under Distorted Data

The simultaneous distortion of inflation and employment data is pushing the Fed into a policy dilemma. On the one hand, if the rebound in CPI in May confirms the tariff transmission effect, core inflation that continues to be above 2% may force the Fed to maintain high interest rates; on the other hand, the “false tension” in the labor market caused by immigration may mask the risk of economic slowdown, and interest rate cut signals should also be cautious.

Ronald Temple, chief market strategist at Lazard, pointed out: “The Fed will not raise interest rates due to tariff inflation, but if core inflation approaches 4%, there is no way to talk about rate cuts.” The current federal funds rate target range is 4.25%-4.50%. CME data shows that the market has a 99% probability of maintaining interest rates in June, but Torres of Interactive Brokers predicts that given the large spread between the policy rate and the inflation rate (4.5% versus slightly above 2%), the Fed may start cutting interest rates in July, and cut interest rates 1-2 times by the end of the year.

Conclusion: When will the policy-driven economic “fog” dissipate？

As tariffs and immigration policies become the core variables that influence economic data, the US economy is entering a special cycle of “policy-driven rather than market-driven”. For investors and policymakers, the ability to penetrate the surface of data and identify structural changes and temporary disturbances has never been so important. The Fed's policy balance between “false inflation” and “false employment” not only affects the direction of interest rates, but will also test its regulatory wisdom in an era of policy uncertainty. In the coming months, with the continued disclosure of CPI and immigration data, this policy-induced economic reconstruction will continue.