Supreme Court's Tariff Ruling Could Force $140B Refund, Spur Fed Rate Cuts

UBS Group AG has warned that a potential Supreme Court ruling against President Donald Trump's high-profile tariff policies could force the U.S. government to refund $140 billion in collected duties, creating fiscal strain while simultaneously opening the door for a Federal Reserve rate cut. The Swiss bank's analysis, outlined in a recent UBS report, highlights the dual-edged impact of such a legal reversal: a sudden fiscal hit and a shift in monetary policy dynamics.

The proposed refunds stem from ongoing legal challenges to Trump's 39% tariffs on Swiss goods—the highest in the developed world—and similar levies on other trade partners. If the court deems these tariffs unlawful, the U.S. Treasury would face a significant outflow of funds, equivalent to 7.9% of the 2025 estimated federal budget deficit, the UBS report says. UBS estimates this would push the government to rely on tools like Section 201 and 301 of the Trade Act of 1974 to rebuild trade barriers, a process expected to take several quarters and limit short-term policy flexibility.

The fiscal repercussions could prompt the Fed to ease monetary policy. UBS argues that a post-ruling environment with lower effective tariffs would boost household purchasing power, ease inflationary pressures, and create room for rate cuts. "The Fed could leverage this scenario to normalize policy without risking inflation overshoots," the UBS analysis states. This aligns with broader market expectations, as traders have priced in a rate cut for December, with further reductions anticipated in 2026, according to a PBS explainer.

The legal battle over tariffs has intensified as the Supreme Court weighs whether the Trump administration overstepped its authority under the International Emergency Economic Powers Act. A Reuters report says a ruling against the tariffs would not only force refunds but also embolden lawmakers, who have criticized the executive branch's unilateral trade actions. Meanwhile, Swiss business leaders—including Rolex CEO Jean-Frederic Dufour and Partners Group founder Alfred Gantner—have lobbied directly with Trump to lower tariffs, signaling growing urgency among export-dependent industries, according to a Business Times report.

UBS's assessment also underscores the limited market impact of tariff refunds. While importers could benefit from reduced costs, these savings are unlikely to significantly alter S&P 500 earnings expectations, as tariff-driven expenses have not heavily burdened corporate profits, the bank notes. The bank projects that trading partners refraining from retaliatory measures would stabilize the U.S. economy, with stock markets likely to welcome the reduced trade tensions.

The Fed's potential rate cuts, however, remain contingent on broader economic conditions. Trump administration officials, including Treasury Secretary Scott Bessent, have warned of looming recession risks and pressured the central bank to act preemptively, according to a New York Times report. Yet, analysts caution that rate cuts alone may not offset the drag from high mortgage rates and a cooling housing market, as noted in the PBS explainer.

As the legal and economic crosscurrents converge, UBS's analysis positions the repeal of Trump-era tariffs as a pivotal moment for U.S. fiscal and monetary policy. The outcome could redefine trade dynamics while offering a path for the Fed to recalibrate its approach in a post-pandemic era.