If Trump's Tariff Policies Are Overturned, It Could Open Up Room for the Federal Reserve to Cut Rates

According to the latest analysis from UBS, the case currently before the U.S. Supreme Court regarding Trump's tariff authority could trigger significant ripple effects in fiscal and monetary policy.

The analysis suggests that if the court ultimately rules these tariffs as illegal, the U.S. government will face substantial pressure to refund approximately $140 billion in tariffs to importers. This amount is equivalent to 7.9% of the federal budget deficit projected for fiscal year 2025.

Notably, this potential ruling could have positive implications. In the short term, the large refunds would create a significant fiscal shock, adding to the pressure on an already strained government budget.

However, from a long-term structural perspective, such a decision might encourage the U.S. to return to a low-tariff trade environment. If trading partners do not retaliate, this could ultimately benefit the U.S. economy and stock market growth.

In anticipation of a possible policy vacuum, analysts expect the government to turn to legal tools such as Sections 201 and 301 of the Trade Act of 1974 to rebuild tariff barriers. However, this process is expected to take several quarters and would significantly reduce trade policy flexibility.

Regarding market impact, the refunds could provide unexpected gains for importers. But since tariffs had not significantly suppressed earnings expectations for the S&P 500, the overall market impact might be limited. More importantly, the ruling could lead to a reduction in effective tariffs, boosting American household purchasing power and easing inflation pressures.

Overall, the analysis suggests that as long as trading partners exercise restraint and avoid escalating retaliatory measures, these developments could ultimately create more room for the Fed to cut interest rates.

Additionally, this potential structural shift toward a low-tariff environment is likely to be welcomed by stock investors and the venture capital market, as it alleviates inflation concerns and creates favorable conditions for monetary policy easing.

#TrumpTariffPolicy