Trump’s trade war risks undermining his hopes of hefty US interest rate cuts | Graeme Wearden
President Donald Trump raised his global tariff to 15%, a move that could keep import prices high and pressure the Federal Reserve to delay interest‑rate cuts. The new tariff adds uncertainty for the incoming Fed chair Kevin Warsh as inflation remains sticky and policymakers debate the appropriate…
President Donald Trump announced on Friday a fresh round of tariffs, starting at 10% and climbing to 15% on a broad range of imported goods. The move came just after the U.S. Supreme Court struck down his earlier sweeping tariff scheme, and it has immediate implications for the Federal Reserve’s ability to deliver the sizable interest‑rate cuts the president has been urging.
How the new tariff level works
Trump’s latest tariff plan raises the effective global tariff rate to roughly 14.5% for the next five months, according to Capital Economics. The increase means American importers will face higher costs for foreign‑made products, a cost that is likely to be passed on to consumers. The higher import prices feed directly into the inflation gauge that the Fed monitors, creating a head‑wind for any move toward lower rates.
Why the Fed cares about tariffs
The Federal Reserve’s dual mandate—maximum employment and price stability—means that any factor that pushes inflation upward forces the central bank to consider tighter monetary policy. With the new tariff regime, the Fed’s preferred inflation measure has already shown a modest uptick, dampening market hopes for a rate cut in March. Analysts now expect the first cut, if it comes, to be delayed until later in the year, perhaps around the holiday season.
Kevin Warsh steps into a contentious environment
Kevin Warsh, recently confirmed as the next Fed chair, inherits a divided policy committee. Minutes from the Fed’s last meeting reveal a split: some governors argue that a rate hike may be needed to keep inflation anchored, while others still see room for cuts. Warsh has previously advocated for less vocal forward guidance, preferring a quieter communication style. However, the heightened uncertainty from Trump’s trade stance could force the Fed to adopt a more cautious, data‑driven approach, leaving markets guessing about the timing of any rate adjustments.
Political pressure and the president’s expectations
Trump has been vocal about his desire for “very substantial” rate reductions, linking lower rates to his broader economic agenda of boosting growth and employment. He argues that the strong corporate earnings and robust GDP numbers this quarter should translate into cheaper borrowing costs. Yet the president’s own trade policy may be undermining that goal. By raising import prices, the tariffs could sustain inflationary pressure, giving the Fed a reason to keep rates higher for longer.
Historical parallels and expert opinions
The situation echoes the 1990s, when then‑Fed chair Alan Greenspan kept rates low during the tech boom, a stance later blamed for the dot‑com bust. Treasury Secretary Scott Bessent has hinted at a similar deregulation push, but critics like Dario Perkins of TS Lombard warn that the current macro environment differs sharply from the 1990s. AI‑driven productivity gains remain uncertain, while supply‑side constraints—such as reduced immigration and higher tariffs—have already dented U.S. production capacity.
Market reactions and future outlook
Financial markets have priced in a near‑zero chance of a Fed rate cut in March, with most analysts forecasting two cuts by the end of the year, assuming inflation eases. The new tariff, however, adds a wildcard. Companies that paid the earlier International Emergency Economic Powers Act (IEEPA) tariffs are lobbying for refunds, which could act as a fiscal stimulus if reimbursed, but the process is likely to be slow and politically fraught.
What comes next?
Warsh’s first months will be defined by how he balances Trump’s political pressure with the Fed’s mandate. If inflation remains sticky, the Fed may hold rates steady or even consider a modest hike, directly contradicting the president’s wishes. Conversely, if the tariff‑induced price spikes fade and the broader economy continues to grow, the Fed could resume its cut cycle later in 2026. The interplay between trade policy, inflation, and monetary policy will shape the U.S. economic narrative for the rest of the year.
Why it matters
The clash between Trump's tariff escalation and the Fed's rate‑cut agenda could delay cheaper borrowing costs, affecting everything from mortgages to business investment.
Key points
- Trump raised the global tariff to a maximum of 15%, pushing the effective rate to about 14.5% for the next five months
- Higher import costs are likely to keep inflation elevated, complicating the Fed’s case for rate cuts
- New Fed chair Kevin Warsh inherits a divided committee and intense political pressure from the White House
- Analysts now see little chance of a March rate cut, with most expecting cuts only later in the year
Frequently asked questions
How does the new 15% tariff affect inflation?
The tariff raises the cost of imported goods, which can be passed on to consumers, pushing the overall price level higher and making it harder for the Fed to justify lowering rates.
What is Kevin Warsh’s stance on forward guidance?
Warsh has previously argued for less vocal forward guidance, preferring a quieter communication style that lets market participants focus on data rather than explicit signals.
When might the Fed consider cutting rates despite the tariff?
If inflation shows a clear and sustained decline and economic growth remains robust, the Fed could resume cuts later in 2026, possibly around the holiday season.
