Trump’s trade war risks undermining his hopes of hefty US interest rate cuts | Graeme Wearden

Donald Trump and Denis Healey don’t have much in common. One of the greatest prime ministers Britain never had shares little of his famous hinterland with what some historians see as one of the worst occupants of the White House.

But Trump would be well advised to remember Healey’s first law of holes – when you’re in one, stop digging

Instead, having seen the supreme court reject his sweeping global tariffs on Friday, Trump dug his shovel out, announcing a new global tariff of first 10%, then upping it to 15%. That may have lifted the president’s mood, after a stinging rebuke from the top judges in the US, but it risks backfiring on his hopes for hefty interest rate cuts this year.

The trade war, with its exhortation to businesses to make their products in the US if they know what’s good for them, is one of Trump’s signature policies. The logic is to create prosperity and long-term opportunity through bringing more investment and innovation into the US, lifting incomes.

It also provided lucrative opportunities to tax Americans, with the tariffs rejected by the supreme court estimated to have raked in roughly $110bn (£81bn) from those importing goods from overseas.

The City consultancy Capital Economics has calculated that by raising the global tariff to 15%, Trump has ensured that at least for the next 150 days the effective tariff rate will rise back to 14.5%, slightly above where it had settled before the supreme court stuck down the reciprocal tariffs based on the International Emergency Economic Powers Act.

That means American importers will still be paying higher prices for goods from overseas, with a knock-on impact on inflation.

Companies who have stumped up for IEEPA tariffs are agitating for their money back. That could be a potential fiscal stimulus, if they get the cash. This adds up to a headache for the US Federal Reserve, and its next leader, the freshly anointed Kevin Warsh, and may make it harder to justify a rate cut.

Trump made it clear what he wants from Warsh last Friday, declaring “interest rates should come down very substantially” on his watch. However, Warsh will be on a sticky wicket, as the Fed appears split – the minutes of its last meeting showed that some Fed officials wonder whether rate increases could soon be needed to keep inflation pegged, while others do expect cuts ahead.

A rate rise from the Fed would enrage the ever-flammable Trump. Last month he told the World Economic Forum it was wrong that markets went down when the US reported “a great quarter, a great month, great earnings” because investors expect higher interest rates as a result.

Now it may feel counterintuitive but this “good news is bad news” mechanism is vital for healthy financial markets. If faster growth leads to higher demand, and inflationary pressures, a responsible central bank should be diluting the punchbowl (through tighter monetary policy) to prevent the party getting out of hand rather than encouraging the revelry.

On this point, central bankers’ long-term record is mixed. When he was the Fed chair, Alan Greenspan resisted rate increases during the technology boom of the 1990s – creating an era of cheap money that culminated in the dot-com crash.

While the Trump White House would like Warsh to model his tenure on Greenspan, the US – and world – economy is rather different from three decades ago, even though the Treasury secretary, Scott Bessent, is pushing a 90s-style deregulation drive.

Dario Perkins of TS Lombard, for example, is not convinced that the Bessent-Warsh combo can recreate the bullish macroeconomic conditions of the 1990s.

“Even if AI productivity gains can match the hype – which seems unlikely – the global inflation backdrop is very different from the 1990s. Tariffs and immigration curbs have damaged US supply potential, while ‘crowding in’ [private sector investment] is mostly just rhetoric,” he warns.

Last week the Fed’s favoured inflation measure rose, dampening hopes that deflationary effects were building. That is why the markets expect virtually no chance of a Fed rate cut in March, although two cuts are expected by Christmas.

It is hard to know exactly what the next Fed chair makes of the current economic situation because, unusually, Warsh and Trump did not hold a joint press conference after the president announced his choice in early February.

In the past, Warsh has indicated that the Fed should dial back its “incantations” rather than keeping its audience on “the edge of its seats” by trying to vocally provide signals to the markets through forward guidance. A worthy idea but one that risks leaving investors guessing about how the Fed will approach an economy where growth slowed at the end of last year, and relatively few jobs are being created.

That policy uncertainty risks undermining the US dollar, and the wider markets, in 2026. And with a president digging in to fight his trade war, Warsh may struggle to persuade the rest of the Fed’s interest rate-setting committee to vote for cuts.

Still, he could always remember another Healey maxim: “We cannot hope to achieve full employment and sustain it until we have mastered inflation.”