Trump’s comeback sends Powell and the Fed back to the drawing board

Federal Reserve Chair Jerome Powell is staring down a whole new economic beast. After months of agonizing over how fast and how far to lower interest rates, Powell’s plan got hijacked the minute Donald Trump clinched his comeback.

The president’s back in power, and his big ideas for the U.S. economy have thrown every interest rate prediction out the window. Financial markets responded immediately, with Treasury yields spiking and the dollar marching up, all flashing the same warning: inflation.

Economists say it loud and clear—Trump’s return means higher prices. Deutsche Bank’s top minds now peg core inflation at around 2.5% for 2025, a jump from the 2.2% they had in mind. They don’t see inflation easing off until late 2026, and that’s only if things go relatively smoothly.

Inflation expectations surge with Trump’s policies

So, what exactly is Trump rolling out? First off, across-the-board tariffs. We’re talking import taxes on goods that’ll send prices higher for American consumers. Then there are tax cuts, which sounds great at first—until you remember that’s pouring gasoline on the inflation fire.

Fewer taxes mean more disposable cash floating around, feeding demand and fueling price hikes. Plus, Trump’s immigration crackdown means a tighter labor market, fewer workers, and higher wages. It’s a triple threat, and the markets are already reacting.

Look at the numbers: Deutsche Bank now sees core inflation at 2.5% through 2026, up from its previous 2.2% estimate. That’s a big jump, especially considering the Fed’s inflation target sits at 2%. This isn’t a minor oversight—it’s the kind of uptick that changes the whole game.

Economists are saying, “Hold up, this means we’re stalling on inflation progress for at least the next two years.” And when Deutsche Bank says that, the Fed listens.

Now, let’s talk Fed strategy. Powell’s got the Fed’s benchmark rate sitting at a pretty high 5%, and there’s already a 25-basis-point cut lined up for Thursday, with another one likely in December. But don’t get comfortable with these cuts.

Deutsche, and a whole list of others, are now saying Trump’s fiscal policy mix might force the Fed to hit pause. Every analyst out there is slicing their Fed rate-cut forecasts for next year. Powell’s going to be forced to think twice before loosening further.

JPMorgan is leading the charge on this recalibration. They’ve already cut back their projections for 2025 rate cuts, now anticipating only a 50-basis-point reduction for the first half, down from their original full-percentage-point estimate.

Nomura Holdings is dialing it down even more, expecting just one cut next year, a sharp pullback from the four they’d projected before Trump’s win. And what’s Powell got to say? Well, don’t hold your breath for anything specific.

The guy’s been tight-lipped on rates beyond the immediate future, and with Trump back in the driver’s seat, he’s even less likely to break character and spill the Fed’s hand.

Global markets react to Fed’s dilemma

And it’s not just the U.S. Fed scrambling. Central banks across the world are watching Trump’s comeback with a mix of anxiety and dread. 

When Washington sneezes, the rest of the world catches a cold, and this time it’s no different. This week alone, around 20 central banks—responsible for over a third of global GDP—are set to decide on rates.

Big players like the Bank of England and Sweden’s Riksbank are already expected to cut rates, bracing for the fallout from Trump’s policies. Europe’s looking pretty worried, too.

The European Central Bank’s Vice President Luis de Guindos came out swinging, saying the global economy is about to face shocks to growth and inflation if Trump goes all-in on his tariff promises. Higher U.S. inflation and interest rates tend to drain capital from emerging markets especially.