The profound divergence and game between the U.S. fiscal policy (tariffs, deficits) and monetary policy.

In July 2025, the U.S. economy is at a critical turning point. The Treasury's monthly budget report shows an unexpected surplus, tariffs and trade wars are significantly heating up, and Fed Chairman Jerome Powell is facing rumors of resignation. Data from the Chicago Board of Options Exchange (CBOT) reveals strong market expectations for a rise in U.S. Treasury yields. These events together outline a complex economic picture, involving deep games of fiscal policy, trade strategies, and monetary policy. This article will delve into these dynamics, combining the latest data to explore their potential impact on the U.S. economy and global markets.

1. Ministry of Finance Monthly Report: Behind the Unexpected Surplus

In June 2025, the Treasury Department reported that the government achieved a budget surplus of $27 billion, with revenues of $526 billion and expenditures of $500 billion. This result is encouraging and stands in stark contrast to the $70 billion deficit from June 2024. Revenues increased from $466 billion to $526 billion, a growth of about 13%; expenditures decreased from $537 billion to $500 billion, a decline of about 7%. This improvement is attributed to a dual effort of increased tax revenues and expenditure control.

1.1 Income composition: personal income tax dominates, customs revenue surges

• Personal Income Tax: In June, individuals paid $236 billion, accumulating to $2 trillion for the fiscal year 2025 (from October 2024 to October 2025), a 6% increase compared to $1.89 trillion in the same period last year. Personal income tax accounts for the majority of government revenue, reflecting that the tax burden mainly falls on individuals.
• Corporate Income Tax: Only $66 billion in June, totaling $366 billion for the fiscal year 2025, a decrease of 6.6% compared to $392 billion in the same period last year. The reduction in corporate tax contributions contrasts sharply with the surge in corporate profits, highlighting the imbalance in tax policy.
• Tariff Revenue: In June, tariff revenue was $26 billion, with a cumulative total of $108 billion for the fiscal year 2025, a year-on-year increase of 300%, a significant rise from $55 billion in the same period of the fiscal year 2024. The surge in tariff revenue is closely related to recent adjustments in trade policy.

1.2 Expenditure Structure: Challenges of Mandatory Expenditure

Government spending is primarily driven by mandatory programs, including Social Security (approximately $1.2 trillion), Medicare and Medicaid (approximately $1.4 trillion), and net interest payments (approximately $750 billion). These programs account for the vast majority of the expected $5.3 trillion in spending for fiscal year 2025 and are politically difficult to cut. For example, Social Security spending has grown at three times the rate of GDP since 1970, far outpacing overall economic growth.

Interest expenses are another major pressure point. With federal debt skyrocketing (expected to reach $33 trillion in fiscal year 2025, accounting for about 120% of GDP), a high interest rate environment is driving up debt costs. Net interest expenses are expected to account for 14% of total spending in fiscal year 2025, close to historical highs. The only way to reduce interest expenses is to adopt a "fiscal-led" strategy, which involves bringing the federal funds rate down to zero, implementing negative real interest rates and financial repression policies, but this would push up inflation and asset prices, creating significant risks.

1.3 Deficit Trend: Short-term Improvement, Long-term Concerns

Despite achieving a surplus in June, the cumulative deficit for fiscal year 2025 has reached $1.3 trillion, with an expected annual deficit of $1.88 trillion, worsening from $1.2 trillion in fiscal year 2024. The deficit as a percentage of GDP is projected to rise from 4.8% in 2024 to 6.5% in 2025, far above the 1% recorded in 2007, marking a historical high for non-crisis periods. The deficit for fiscal year 2026 is expected to decrease to $1.6 trillion, indicating a potential stabilization, but further data is needed for confirmation.

In the long term, the growth of the deficit is driven by the expenditure growth far exceeding that of revenue. Since 1950, the proportion of tax revenue to GDP has remained stable at 15-17%, while the proportion of government spending to GDP has increased from 15% to over 25% by 2025. The growth of debt is particularly astonishing: since 2007, federal debt has increased by 300%, while GDP and tax revenue have only increased by 100%. Each additional dollar of debt only brings about 33 cents of economic return, highlighting fiscal inefficiency.

2. Tariffs and Trade Wars: A New Variable in the Global Economy

In 2025, tariff policy became the core of the United States' economic strategy, aimed at balancing trade deficits, increasing fiscal revenue, and protecting domestic industries. However, the rapid escalation of tariffs triggered global countermeasures and market volatility.

2.1 Latest Tariff Updates

• To Canada: Threatened to impose a 35% tariff on non-NAFTA goods. Canada delays retaliation, hoping to reach a new trade agreement through negotiations.
• To the EU and Mexico: A 30% tariff will be imposed on goods from the EU and Mexico starting August 1, and the EU has threatened retaliation.
• Copper Tariff: A 50% tariff on copper has pushed prices up by 17-18%, and the current increase is stable at 11.8%. As the industrial "Copper Doctor", its price fluctuations reflect global economic expectations.
• On Brazil: Strengthen tariff policies towards Brazil, despite the United States having a trade surplus with Brazil (approximately $15 billion surplus in 2024). This move is seen as politically motivated and may harm bilateral relations.

2.2 Economic Impact of Tariffs

The surge in tariff revenue provides new momentum for public finances. Tariff revenue is expected to reach $300 billion in fiscal year 2025, equivalent to the total personal income tax of the low-income group (bottom 75%). The government has committed to reducing or eliminating income taxes for most people through tariff revenue. In theory, tariffs are primarily aimed at import costs rather than retail prices. For example, an iPhone that costs $1,000 has an import cost of about $500, and a 50% tariff would only increase the cost by $250. A typical earner (such as someone with an annual income of $40,000) would need to spend $60,000 on tariffed goods to pay more in tariffs than in income tax, indicating that for most people, tariff policies may yield a net benefit.

However, the inflation effects of tariffs cannot be ignored. Fed officials (such as Goolsbee) warn that rising tariffs may push up prices, and interest rate cuts should only be considered after observing several months of inflation data (such as PCE). In June 2025, the core PCE inflation rate was 2.6%, slightly above the Fed's target of 2%, with tariffs further increasing the risk of imported inflation.

2.3 The chain reaction of global responses

Counter-tariffs from countries such as the EU and Brazil may trigger a global trade war and disrupt supply chains. The rise in copper prices has already affected manufacturing costs, with global copper demand expected to grow by 3.2% in 2025 (according to the International Copper Study Group data), while tariffs may exacerbate supply tightness. A trade war could also weaken the competitiveness of U.S. exports, with total U.S. goods exports projected at $2.5 trillion in 2024, accounting for 10% of GDP; any retaliatory measures could impact related industries.

3. Corporate Profits and Wage Gaps: The Inequity of Tax Policies

Since the end of the gold standard in 1971, corporate profits have increased by 5878%, while average hourly wages have only grown by 821%. Globalization has led to the outsourcing of high-paying jobs, benefiting low-cost countries, and resulting in a surge in corporate profits, while wages for American workers have lagged behind. In 2025, corporate income tax is expected to decrease by 6.6%, while personal income tax will rise by 6%, exacerbating the inequality of the tax burden.

For example, in the fiscal year 2025, personal income tax accounts for 78% of revenue, while corporate income tax only accounts for 14%. This gap sharply contrasts with the explosive growth of corporate profits. The average profit margin of S&P 500 companies reached 12.5% in 2024, a 20-year high, while the real wage growth of American workers (after adjusting for inflation) was only 1.2%. Tariff policies protect domestic industries by raising import costs, which may indirectly support wage growth, but adjustments to the tax structure are more urgent.

4. Monetary Policy and Powell Resignation Rumors

4.1 The ins and outs of the rumors surrounding Powell's resignation

Recently, the head of the federal housing department (suspected to be Py) tweeted, "I heard that Powell will resign," but did not provide a reliable source. Subsequently, he cited the media that reported his tweet as "evidence," creating a circular reference. Despite the lack of conclusive evidence, this rumor is seen as pressure on Powell and reflects the divergence in policies between the government and the Fed. The government leans towards a loose monetary policy to support fiscal expansion, while the Fed emphasizes fighting inflation and maintaining caution.

4.2 The Fed's policy dilemma

The Fed faces dual pressures: inflation risks from tariffs and high federal debt. In June 2025, the federal funds rate remains at 4.75-5%, with the market expecting a 40% chance of a rate cut before the end of 2025 (CME FedWatch tool). Goolsbee stated that more inflation data is needed to confirm the trend, indicating the Fed's wait-and-see attitude.

4.3 Treasury Market Dynamics

CBOT data shows that market expectations for a rise in Treasury yields have strengthened:

• Five-Year Treasury Futures: Net short positions increased by 39,785 contracts, total net short positions at 2.516 million contracts.
• Ten-Year Treasury Futures: Net short positions increased by 56,000 contracts, with total net shorts at 840,000 contracts.
• Two-year Treasury futures: Net short positions increased by 14,000 contracts, a relatively small amount.

This data indicates that the market is betting on a steeper yield curve, with long-term interest rates (especially the ten-year rate) rising faster. This aligns with a "fiscal dominance" strategy (such as interest rate cuts and issuing short-term debt), which may push up inflation and debt costs. By June 2025, the yield on ten-year government bonds will reach 4.2%, an increase of 0.5 percentage points compared to the same period in 2024.

V. Future Outlook and Policy Recommendations

The Necessity of Fiscal Reform

To reduce the deficit-to-GDP ratio to a sustainable level of 2-3%, it is necessary to address both the revenue and expenditure sides:

• Revenue Side: Reform the tax structure, increase the proportion of corporate income tax, and reduce the individual tax burden. For example, restoring the minimum corporate tax rate to 25% (currently 21%) could increase revenue by approximately $200 billion.
• Expenditure side: Optimize the efficiency of mandatory spending, such as controlling cost growth through Medicare reform. In 2024, Medicare spending will account for 5.8% of GDP, and is expected to rise to 7% by 2030.

5.2 The balance of tariff policy

The increase in tariff revenue provides a buffer for the finances, but excessive reliance should be avoided. Suggestions:

• Establish a transparent tariff exemption mechanism to reduce the cost of consumer goods for low-income groups.
• Negotiate with trading partners to reduce retaliatory tariffs and maintain the stability of global supply chains.

5.3 coordination of monetary policy

The Fed needs to find a balance between combating inflation and supporting economic growth. Suggestions:

• Maintain data-driven policies and avoid premature rate cuts.
• Coordinate with the Ministry of Finance to clarify debt management strategies and reduce market concerns about rising yields.

6. Conclusion

The US economy in 2025 is at a crossroads. The budget surplus in June injects some optimism into the fiscal situation, but high deficits, unfair taxation, and trade war risks still pose challenges. The advancement of tariff policies provides new momentum for income growth, but there is a need to fulfill tax cut promises while being vigilant about inflation and global countermeasures. The policy divergence between the Fed and the government has intensified, and the market's expectations for rising yields reflect uncertainty. In the future, structural reforms and policy coordination will be key to addressing these challenges.

By continuously monitoring fiscal data, tariff effects, and monetary policy dynamics, the United States is likely to find balance in a complex environment, maintaining economic stability and growth.