Since Trump’s second term, trade wars have been among the hottest topics in the US. Last week, the President said he would send letters to more than 150 countries notifying them that their tariffs could be 10% or 15%. The S&P 500 and Nasdaq got nervous momentarily, but then resumed growth.

This resistance to negative news seems to come from the TACO trade — investors bet on a de-escalation after the initial tough talk or tariff threats. As for the concern about a pickup in inflation that the Fed chairman keeps mentioning in every speech, some started questioning whether the risk is overblown.

After all, it has been months since Donald Trump introduced the first round of tariffs this year, and the impact on prices has been relatively mild. In June, headline inflation rose by 0.3% from the previous month, while core inflation rose by only 0.2% (below expectations), which is far from worrying.

Does this mean the Fed was wrong all along?

Not necessarily. According to the Fed’s July Beige Book, some companies refrained from raising prices because customers were becoming more cost-sensitive, which squeezed their profit margins. If these cost pressures persist, we could see consumer prices rise more rapidly in late summer.

With that in mind, it’s possible the full impact of tariffs just hasn’t shown up yet, partly because companies have been absorbing the costs. That’s one reason analysts have lowered their earnings forecasts for the second quarter. If that’s the case, businesses will eventually look to recover those losses.

The bottom line is that as long as tariff uncertainty persists, the Fed is unlikely to rush to cut interest rates, even if the U.S. president continues to push for it. The real problems could come if Donald Trump finally forces Jerome Powell to resign, as monetary policy does not align with his agenda.

Forcing the Fed chairman out could undermine confidence in the central bank and the dollar itself, subsequently triggering a further decline in its value and in U.S. Treasuries. No wonder the Bank of England has asked major banks to stress test their exposure to a potential dollar crisis.

In plain terms, the full impact of tariffs hasn’t hit yet. And the Fed knows it. Its unwillingness to cut rates as quickly as Trump demands suggests a deeper fear: inflation is far from conquered.

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