Trump’s Escalating Trade War Threatens Federal Reserve’s 2026 Rate Cut Plans Amid Rising Inflation Fears
By Staff Reporter | Updated February 2026
President Donald Trump’s aggressive tariff policies, which have driven average U.S. tariff rates to a peak of 28% since his inauguration, are fueling concerns that they could derail anticipated interest rate cuts by the Federal Reserve in 2026. Economists warn that the trade war’s inflationary pressures may force the Fed to hold rates steady, undermining Trump’s hopes for lower borrowing costs to boost economic growth.
Tariffs Spike to Record Levels, Sparking Inflation Worries
The Trump administration’s second-term trade agenda has dramatically escalated, with tariffs expanding in scope and unpredictability. Average tariff rates jumped from 2.4% on inauguration day to 28% by April, marking a sharp departure from the first term. Signals of even higher levies, potentially up to 200% on pharmaceuticals by mid- to late-2026, add to the uncertainty.[3][4]
While tariff revenues have risen by less than $200 billion annually—painful for consumers and businesses but not enough to destabilize a $30 trillion economy—the policies have contributed to broader economic strains. Non-shelter inflation has climbed 20 basis points since inauguration, and risk premia on Treasuries have increased by 30 basis points. Headline unemployment has risen 40 basis points, with the broader U-6 measure up 90 basis points, signaling softening labor demand.[4]
Markets have reacted swiftly. A global bond selloff, exacerbated by geopolitical tensions and trade war fears, pushed the 10-year Treasury yield up 10 basis points in less than a week recently. Mortgage rates followed suit, rising to 6.25% from 6.18%.[1] These developments highlight how Trump’s tariffs could counteract the Fed’s efforts to ease monetary policy.
Fed’s Rate Cut Outlook Clouds Over
The Federal Reserve has already delivered 1.75 percentage points of cuts since September 2024, bringing rates down from over-a-decade highs. Bankrate’s 2026 forecast initially projected three more cuts totaling 0.75 percentage points, potentially aligning with pre-pandemic peaks. However, complicating factors like the One Big Beautiful Bill Act of 2025—expected to inject $100 billion into the economy via tax cuts and refunds—are stoking inflation risks.[1]
Economist Nguyen now anticipates only two cuts in 2026, likely later in the year, citing heightened inflation from fiscal stimulus. “Whenever you have that kind of money being injected into the economy, you’re going to see higher GDP growth, but at the same time higher inflation,” Nguyen noted. Early-year cuts in January or March face a higher bar.[1]
J.P. Morgan analysts echo these concerns, warning of lingering recession risks amid ongoing trade negotiations with China, Japan, Korea, and India. They foresee range-bound S&P 500 markets between 5,200 and 5,800, achievable only with broad trade deals and reduced volatility—scenarios deemed unlikely in the short term. Investor worries also center on Trump’s criticism of Fed Chair Jerome Powell, raising fears of eroded central bank independence.[3]
Why Dire Predictions Haven’t Fully Materialized—Yet
Despite alarms, Trump’s policies haven’t triggered a recession or inflation surge as some predicted. The Brookings Institution attributes this to overestimated shocks: tariffs’ pass-through to consumers has been muted due to evasion, transshipments, and delayed implementation; net immigration impacts are smaller than feared; and Fed independence remains resilient given the FOMC’s composition.[2][4]
Trading partners have refrained from major retaliation so far, further dampening effects. Brookings’ Ben Harris highlighted that political influence on the Fed may take years to fully emerge, while Western partners are only now exploring trade alternatives to the U.S., as discussed at Davos.[2]
“The complexity of the FOMC’s composition means that it may take years until we see the full impact of political influence.” — Ben Harris, Brookings Institution[2]
Trump’s aggressive use of tariffs, combined with immigration crackdowns shrinking the labor force and fiscal expansions via the One Big Beautiful Bill Act, has added to national debt without major interest rate reactions—yet. Unemployment remains historically low, and consumer spending holds firm.[2]
Long-Term Risks Loom Large
Experts caution that effects are still unfolding. While short-term resilience is evident, sustained high tariffs could erode economic autonomy, harm industries, and forfeit tariff revenue potential. The Fed controls short-term rates, but longer-term costs like mortgages tie more closely to Treasury yields, sensitive to growth and inflation expectations.[1][4]
Trump’s Supreme Court victory striking down some tariffs hasn’t quelled broader concerns. Pressure on the Fed to cut rates persists, including attempts to influence or remove governors like Lisa Cook, but markets view these as constrained.[2][4]
Broader Economic Implications
By many metrics, the U.S. is slightly worse off than a year ago, with rising unemployment measures and inflation. Policymakers face a delicate balance: lower rates could juice growth but risk more inflation, while trade wars introduce volatility. Investors are advised to brace for uncertainty, with equity markets unlikely to surge without trade resolutions.[1][3][4]
As negotiations continue, the interplay between tariffs, fiscal policy, and Fed actions will define 2026’s economic trajectory. Trump’s vision of hefty rate cuts to fuel growth clashes with the inflationary realities his trade war may unleash, leaving markets on edge.