Trump’s full-frontal assault on free trade is nothing short of breathtaking—for its scope, its scale, and its wilful lack of nuance. The average tariff is expected to balloon to 25% or more this year, up from under 3% previously. That’s not a policy tweak—it’s a tenfold leap from Trump’s first-term tantrums.

The consequences? Devastating, naturally. Annualised inflation is set to brush 5% over the coming six months, as import prices rise and domestic producers—sheltered from any meaningful competition—gleefully hike their own. Meanwhile, demand takes a nosedive. Businesses will shelve investments amid tariff-related uncertainty, while consumers, facing what amounts to a $600 billion tax hike, will tighten their belts. And let’s not pretend congressional tax breaks will save the day—especially when lower-income households, which spend more of their income, bear the brunt of the burden.

Even worse, the economy’s long-term growth potential is likely to erode. Deportations and dwindling immigration will sap the labour supply while productivity growth slows. That puts the real sustainable GDP growth rate around 1%, down from 2.5–3% last year. In short, stagflation is now the optimistic scenario. A full-blown recession with persistent inflation is looking far more probable.

So what can the Fed do, assuming it wants to help? Not much without risking more profound pain. Usually, it tackles inflation by raising interest rates—precisely the wrong prescription during a downturn. Jerome Powell has suggested the Fed might look past short-term inflation if it doesn’t affect expectations. That’s given some investors false hope that the central bank might prioritise growth over prices. Good luck with that.

There are, however, several reasons to be sceptical. First, inflation has been running above the Fed’s 2% target for years. If that trend continues—or worsens—expectations could come unanchored. Second, not all shocks are created equal.

Tariff-driven inflation, like the oil price spikes of the 1970s, hits productivity and sticks around. Back then, it took a brutal recession and short-term rates near 20% for the Fed to wrestle inflation to the ground.

Third, perception matters. If markets suspect the Fed is looking the other way on inflation to protect growth, that perception alone can fuel further price pressures. Inflation expectations, after all, drive the true cost of taming inflation. When expectations are well anchored, the Fed can tighten without triggering mass unemployment. But once those anchors lift, the “sacrifice ratio” soars. In 1970s-style conditions, it might take a 2-point rise in unemployment to shave just one percentage point off inflation. Translation: a nasty recession becomes the only option.

All of this leaves the Fed in a delicate bind. Any loosening of policy that stokes inflation expectations now could demand a much harsher response later. Investors, therefore, are likely far too sanguine about the prospect of a helping hand from the central bank. A more cautious approach—tempered by heightened economic uncertainty—seems inevitable.

The market implications? Bleak. Equities face a lose-lose scenario: inflation persists if companies pass on higher import costs and the Fed stays hawkish. If they don’t, margins contract and profits suffer.

As for bonds, the key lies in the path of short-term interest rates. Markets are currently pricing in over 100 basis points of cuts this year. That’s only likely—let alone justified—if the economy hits a serious wall. But this isn’t 2019 when the Fed had ample room to cut in the face of subdued inflation. Today, its wiggle room has shrunk dramatically.

Trump’s tariffs are already roiling markets and sowing global discord. The Fed may want to stay above the fray—but it won’t be easy when the economic crossfire begins.