A federal appeals court ruling that most of President Donald Trump’s tariffs are illegal has thrown another layer of uncertainty onto US economic policy. While the tariffs remain in place for now, the administration has until October 14 to appeal to the Supreme Court. If the court accepts the case (which is highly probable), it is generally believed that arguments will likely begin in early 2026 with a decision by late spring or early summer. Until then, businesses and consumers will continue to pay duties that may ultimately lack legal standing.

If the Supreme Court ultimately upholds the lower courts’ decisions, large parts of Trump’s tariff framework could be dismantled. Yet the administration could still reintroduce narrower duties under alternative statutes, such as those relating to national security and or unfair trade practices. This suggests that trade uncertainty could persist well into next year.

Potential Fiscal Fallout

A noteworthy economic twist lies in the possibility of refunds on previously collected tariffs, which is currently estimated at more than US$200 billion. Such repayments would represent a reversal of past government revenue and, if ordered with interest, an outright increase in federal outlays.

This comes at a delicate fiscal moment. The recently passed “One Big Beautiful Bill” is expected to widen US budget deficits significantly over the next decade by combining tax cuts and higher spending. In that context, tariff refunds could reduce near-term revenues and compel the Treasury to issue more debt to cover the shortfall. They would also add to annual deficits, worsening the fiscal deterioration already built into the legislation, and increase borrowing needs at a time when debt levels are projected to rise potentially pushing yields higher if investors demand greater compensation for holding US debt.

Paradoxically, refunds could also prove deflationary. By lowering import prices and easing cost pressures, tariff refunds could reduce inflation. If investors expect weaker inflation, they may demand less compensation in the form of higher interest rates. As a result, when the US Treasury issues new debt or rolls over existing debt, it may pay lower interest. Over time, that could modestly reduce the government’s overall debt-servicing costs. Companies and households might also indirectly benefit if lower inflation leads to reduced borrowing costs in the broader economy.

The Fed’s Policy Dilemma

For the US Federal Reserve, tariff refunds introduce yet another moving part. A large one-off deflationary shock could strengthen the case for earlier rate cuts, even as slowing growth and a softer labour market already tilt policy in that direction. But the Fed would need to determine whether refunds represent a temporary repricing of goods or a more durable shift in inflation dynamics. Either way, trade policy would join fiscal policy as a significant factor in shaping the Fed’s path forward. The uncertainty around how refunds would flow through to prices and corporate balance sheets will likely keep policymakers cautious until clarity emerges from the Supreme Court.

Market Implications

For equities, sector outcomes could diverge widely. Import-heavy retailers and manufacturers would gain from tariff relief and potential refunds, while domestic producers that benefited from tariff protection might face renewed competition.

For bonds, the outcome is more nuanced. Increased issuance associated with tariff refunds and the One Big Beautiful Bill could steepen the US yield curve, potentially weighing on valuations for longer-dated securities. At the same time, disinflationary effects from the refunds could reduce inflation expectations, leading to lower inflation premiums and, in turn, lower yields and higher bond prices. As for the U.S. dollar, its path may hinge on shifting expectations around trade balances, Federal Reserve policy, and the long-term sustainability of US fiscal dynamics.

Conclusion

The appeals court ruling has not only raised questions about the legality of Trump’s tariffs but also about the fiscal and monetary landscape that follows. Potential tariff refunds could collide with the expansive fiscal commitments of the One Big Beautiful Bill, placing pressure on both US Treasury financing and debt trajectories. Until the Supreme Court rules, one certainty remains: uncertainty will continue to dominate the outlook for US trade, fiscal policy, and markets.

Eugene Stanley is Vice-President, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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Eugene Stanley.