Donald Trump’s promise to unleash massive tariffs on imports the second he’s back in the Oval could spark a chain reaction from the Federal Reserve that he might not anticipate—or like.

The US central bank, led by Jerome Powell, has battled inflation with aggressive rate hikes since 2022, and Trump’s tariff plans could throw a wrench into their already delicate balancing act. The result? Rising costs for everyone and a central bank stuck between fighting inflation and avoiding economic disaster.

Trump’s talking about a 20% charge on all imports and up to 60% for goods from China. Just last week, he threatened 25% tariffs on Mexico and Canada—two of the biggest U.S. trading partners—on his first day back in office. For businesses, that means skyrocketing costs. For the Fed, it means an inflation headache.

Tariffs will force the Fed’s hand

The Federal Reserve’s job is to keep inflation in check and the economy steady. But tariffs, like the ones Trump’s proposing, make that nearly impossible. They push up prices across the board. Businesses pass these higher costs to consumers, and suddenly, the inflation fight that Powell has been waging for years gets a whole lot harder.

In Trump’s first term, the Fed ran simulations to predict the economic effects of a 15% tariff hike on all imports. The results were bleak.

Fed economists forecasted that costs for households and businesses would rise, spending would drop, and inflation would spike temporarily. To soften the blow, they suggested cutting interest rates. That was back when inflation was under control.

Now, the situation is worse. Inflation hit a 40-year high in 2022 and is still above the Fed’s 2% target. Powell and his team can’t afford to let it climb again, even if it’s caused by tariffs. The Fed is unlikely to respond with rate cuts this time around.

Instead, they might be forced into rate hikes—exactly the kind of move Trump hated during his first term. Justin Weidner, an economist at Deutsche Bank, says the Fed could even skip planned rate cuts entirely. “Temporary price increases from tariffs could keep the Fed on the sidelines,” he explains.

But the real challenge is messaging. Powell can’t downplay inflation spikes after the Fed’s post-pandemic blunder of calling inflation “transitory.” That mistake damaged their credibility, and they’re not about to repeat it.

Instead, Bloomberg predicts they’ll likely label any tariff-driven inflation as “elevated due to tariff effects” to separate it from broader economic trends.

Trump’s day-one plan: Tariffs and chaos

Raising costs for imported goods could hurt businesses and consumers, leading to higher prices everywhere—from grocery stores to construction sites.

Powell has been clear that the Fed will respond to policies only after they’re enacted. This means Trump’s tariff plans won’t factor into the Fed’s December meeting, where a rate cut is expected.

But the January meeting—just days after Trump’s inauguration—will be a different story if his Day-One tariffs go live. The Fed will need to act fast if inflation spikes.

This isn’t uncharted territory for Powell. In 2018, the Fed ran an exercise to prepare for a tariff-driven inflation scenario. They assumed a 15% hike on all non-oil imports, paired with retaliatory tariffs from trade partners. The results were ugly.

Inflation rose sharply in the short term, while productivity plummeted as industries scrambled to adjust. Fed economists proposed two responses: raise rates to fight inflation or cut rates to support growth. They chose the latter, betting that tariff-driven inflation would fade quickly.

But that decision came with a major assumption: stable price expectations. Today, that assumption no longer holds. Inflation has been anything but stable since the pandemic, and Powell knows better than to gamble on short-term spikes resolving themselves.

Beyond tariffs: Trump’s other plans

Trump’s economic plans go beyond tariffs, creating even more uncertainty for the Fed. His proposed tax cuts could drive consumer demand through the roof, adding more inflationary pressure. At the same time, his threats of mass deportations could destabilize the labor market, disrupt industries, and shrink the economy.

In 2018, Trump’s tax cuts boosted inflation, prompting the Fed to raise rates. A year later, they reversed course with rate cuts to counter a slowing economy. Powell can expect a similar balancing act this time, with Trump’s economic policies pulling the economy in opposite directions.

Trump’s relationship with the Fed was rocky during his first term, and there’s no reason to believe it will improve. He frequently bashed Powell for keeping rates too high, accusing the Fed of undermining his economic agenda. If tariffs push inflation up again, Powell could become Trump’s favorite punching bag.

This year, the Fed began cautiously cutting rates after the most aggressive hiking cycle since the 1980s. Powell has stressed the importance of being data-driven, but Trump’s tariffs could force his hand.

“Six years ago, inflation was low, and expectations were anchored,” Powell said recently. “Now, inflation is still running above 2%. We’ll take all that into account.”

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