Allogeneic hematopoietic stem cell transplantation (HSCT) is a curative therapy, but the large number of HSCs required limits its widespread use. Host conditioning and donor cell composition are known to affect HSCT outcomes. However, the specific role that the posttransplantation signaling environment plays in donor HSC fate is poorly understood. To mimic clinical HSCT, we injected human umbilical cord blood (UCB) cells at different doses and compositions into immunodeficient NOD/SCID/IL-2Rgc-null (NSG) mice. Surprisingly, higher UCB cell doses inversely correlated with stem and progenitor cell engraftment. This observation was attributable to increased donor cell–derived inflammatory signals. Donor T cell–derived tumor necrosis factor–α (TNFα) was specifically found to directly impair the survival and division of transplanted HSCs and progenitor cells. Neutralizing donor T cell–derived TNFα in vivo increased short-term stem and progenitor cell engraftment, accelerated hematopoietic recovery, and altered donor immune cell compositions. This direct effect of TNFα on transplanted cells could be decoupled from the indirect effect of alleviating graft-versus-host disease (GVHD) by interleukin-6 (IL-6) blockade. Our study demonstrates that donor immune cell–derived inflammatory signals directly influence HSC fate, and provides new clinically relevant strategies to improve engraftment efficiency during HSCT.