Stagflation Is on the Way -- the Credibility Premium Repricing

Thoughts on the Market 

August 27, 2025

The recent escalation in political pressure on the Federal Reserve -- marked by President Trump’s unprecedented firing of Fed Governor Lisa Cook coupled with his hyper-aggressive, vitriolic attacks on Fed Chairman, Jerome Powell, have triggered a regime shift in how markets need to price risk.  Trump’s relentless push for immediate and massive rate cuts has now morphed from rhetorical bluster to tangible risks regarding Fed independence, raising serious questions about inflation expectations and asset pricing. 

These attacks, in and of themselves, spell danger for dollar assets going forward, but they are merely part of a broader attack on the credibility of U.S. economic data and economic policy.  Trump’s recent firing of Erika McEntarfer, commissioner of the Bureau of Labor Statistics (“BLS”), further supports the clear trend that U.S. economic data and U.S. economic policy are now becoming politically compromised.  Trump ostensibly fired McEntarfer because he didn’t like the unemployment data the BLS released, but that wasn’t sufficient.  He then maligned her with claims that she altered the data for political reasons despite having no evidence to support this allegation.  Clearly, these are not the sort of actions that one would expect in a free-market, capitalistic society.  Collectively, these actions call into question the statistical integrity of the BLS and the independence of the Federal Reserve, things which were once deemed to be sacrosanct -- but no longer. 

I believe that these events mark a watershed moment that will lead to a dramatic “Credibility Premium Repricing” across U.S. markets, with three core manifestations:

1.  Higher Bond Yields: The Cost of Politicized Policy

• The Fed’s progressive loss of autonomy introduces a new risk premium into long-duration Treasuries. Investors must no longer price just inflation – they must price in possible institutional fragility.  Bond yields may initially fall when the Fed cuts rates, but the long-term risk is for yields to climb.
• Trump’s calls for rate cuts, despite persistent inflation and resilient labor markets, suggest a politically driven monetary pivot. If realized, this would undermine the Fed’s inflation-fighting credibility.
• Concurrently, fiscal expansion via tax cuts and tariff-driven revenue shortfalls will require massive Treasury issuance, further steepening the curve and pressuring yields.

Implication: Duration exposure becomes toxic. TIPS and inflation-linked instruments may outperform as break-evens widen.  There are broader implications which are remarkably dangerous to the health and stability of the United States.

2. Weaker Dollar: Eroding Reserve Confidence

• A Fed seen as politically compromised will progressively weaken the dollar’s safe-haven status. Global investors will reduce dollar holdings amid fears of policy unpredictability and legal instability.  Funding of massive fiscal deficits will become progressively more difficult, with potentially dire consequences. 
• Apart from the risks associated with a compromised and institutionally weakened Fed, if Trump forces premature rate cuts while other central banks remain neutral – or even hawkish (as in the case of Japan over the coming months) -- rate differentials will accelerate dollar depreciation.
• The potential firing of Fed officials -- especially if it triggers a constitutional crisis -- could catalyze a flight from dollar assets.

Implication: FX strategies should favor short USD exposure, particularly against currencies backed by more credible central banks (CHF, SGD, NOK, BOE, etc.)

3. Stagflation Risk: The Return of the 1970s Playbook

• Reimposed tariffs and supply-side constraints raise input costs, creating inflationary pressure even as growth slows.  These price rises are NOT one-time events with a return to the prior pricing. How often do companies lower prices after raising them?
• A politically pressured Fed may cut rates into this environment, risking monetary accommodation amid inflation -- a classic stagflation setup.
• A leadership change at the Fed in 2026 could cement a dovish pivot regardless of macro conditions.
• Political interference in the selection of the regional Federal Reserve Bank presidents would simply add fuel to the raging fire, accelerating the loss of confidence in the central bank’s policies.

Implication: Equity positioning should tilt toward inflation hedges -- gold miners, real asset/commodity plays, and defensives. Avoid cyclicals and rate-sensitive growth.

Strategic Overlay

This is not merely a macro adjustment -- it’s a narrative regime change. Investors must recalibrate for a world where central bank credibility is no longer a given, data  reliability is diminished, and where political interference becomes a core input into asset pricing. We are actively revising our scenario grids to reflect this shift, with overlays for:

• Fed leadership risk
• Legal-constitutional volatility
• FX reserve diversification
• Inflation persistence under politicized policy
• Weakened reliability of economic data

Supplemental Note:

The Fed as a Political Asset — Pricing the Unthinkable

The Federal Reserve has long been treated as a pillar of institutional credibility -- an anchor for inflation expectations, a steward of monetary discipline, and a counterweight to political volatility. That assumption is now under siege.

President Trump’s direct threats to fire Governor Lisa Cook, coupled with his public campaign to coerce rate cuts, signal a strategic shift: the Fed is no longer merely a policy actor -- it is a political asset, subject to capture, coercion, and narrative weaponization.

This update outlines the implications of that shift and offers a framework for investors to price the unthinkable.

Reframing the Fed: From Independence to Instrument

• Political leverage over monetary policy is no longer hypothetical. Trump’s rhetoric suggests a willingness to override institutional norms, including the legal firewall protecting Fed governors.
• The Fed’s leadership transition in 2026 -- when Powell’s term expires -- could install a loyalist with a mandate to suppress rates regardless of inflation dynamics.
• The Fed’s internal resistance (e.g., Powell’s recent caution and firm belief in the need for an independent Fed) may delay the pivot, but the narrative damage is already priced in.

Investor takeaway: The Fed’s credibility is now a tradable variable, not a fixed constant.

Stagflation Scenarios: Political Pressure Meets Supply Shocks

• Reimposed tariffs and geopolitical frictions raise input costs, creating cost-push inflation.
• If the Fed cuts rates into this environment, it risks fueling inflation without stimulating growth -- a classic stagflation trap. 
• The Fed’s inability to credibly signal restraint may lead to anchoring failure, where inflation expectations drift upward despite nominal rate cuts. 
• Long-term risks – unjustified quantitative easing and de facto monetization of assets

Strategic Positioning: Narrative Discipline in a Regime Shift

This is a moment for institutional clarity.  Investors must recalibrate not just their portfolios, but their entire mental construct about monetary policy and the integrity of economic data. The Fed’s politicization is not a tail risk -- it’s a front-page reality!

The Fed Has Demonstrated Its Willingness to Deal with Ethical Violations

The Federal Reserve had a trading scandal that led to the forced resignation of three senior officials between 2021 and 2022. The controversy centered on ethics and optics, not criminal convictions. There was no need for the President to intervene in the case of Lisa Cook, whatever the facts might be.  Powell addressed the ethical violations aggressively and took the necessary steps to maintain institutional integrity.

Resigned Fed Officials Over Trading Scandal

These trades raised serious concerns about conflicts of interest, especially given their timing around major Fed policy decisions during the COVID-19 crisis. While all three denied wrongdoing, the reputational damage was significant enough to prompt early retirements. Fed Chair Jerome Powell responded by initiating a system-wide ethics overhaul, including a ban on individual stock trading for senior officials.

Master of Double-speak

While I have recently defended Powell and shown strong respect for his integrity and ability to withstand the bullying and abuse of Trump in order to maintain the independence of the central bank, I was not happy with Powell’s recent waffling about the inflationary pressures in the economy.  In his speech last week at Jackson Hole, Powell acknowledged that “the effects of tariffs on consumer prices are now clearly visible,” but noted that these represent a “one-time increase in the price level,” not a persistent inflationary trend. That sounds frighteningly similar to his “transitory” framing of post-pandemic inflation.  The severity of the current situation isn’t as severe, but it is not the time to waffle.  We are still suffering from his blunders in 2021 and 2022, when inflation spiked all the way to 9.1%.

Although Powell didn’t use the word transitory last week, he did obfuscate on the Fed’s commitment to achieving its 2% inflation target.  The reality is that the Fed has not maintained its 2% inflation target since it was established decades ago.  Wages may have increased at roughly 2% per annum, but the actual cost of living has been dramatically higher.  Now the Fed is resorting to disappointing double-speak by saying that we need to distinguish structural distortions (like tariffs and immigration policy) from cyclical inflation.  

Powell Is Trying to Convince Us that Not All Price Increases Are Inflation 

The fallacy of this ridiculous logic is that once companies raise prices, they rarely lower them.  That is precisely the experience of inflation – the purchasing power of our dollars has been reduced.  Powell said that the Fed won’t let temporary distortions morph into permanent expectations, but he was totally vague about the timing of addressing these “distortions.”

Tariffs and Structural Noise – We Are Not Abandoning the Inflation Target.  We Are Just Ignoring It for a While.

Powell emphasized that the Fed’s dual mandate -- maximum employment and price stability -- requires balancing risks. With inflation still “somewhat elevated” and unemployment rising, he noted that the Fed must “proceed carefully” and may “adjust our policy stance” depending on how these risks evolve. In other words, the 2% target is still theoretically the anchor, but the path to it will be circuitous.  Put more bluntly -- don’t count on an average 2% annual inflation rate for a LONG time.  The reality is that the Fed is much farther from achieving its inflation target than its employment mandate.

Going Forward – I repeat the same message of the past few weeks:  Sell dollars, stay long gold (or even buy some more), and be very careful with equities

Stocks are the trickiest part of the equation because it is clear that we don’t have restrictive monetary policy right now.  Stocks are at all-time highs, the housing market is at all-time highs, gold is at all-time highs, and so forth.  Stocks are the most obvious bubble.  Do I think that we will have an acceleration higher on the back of lower rates?  Very possibly.  Do I expect that acceleration to become exhausted and then reverse in a vicious sell-off.  Very likely. Either way, I will be happy with my exposures.  I remain long equity volatility for the time being, and I am very comfortable with the knowledge that the stock market is not trading at a level of long-term stability. 

Longer-term, I expect major portfolio rebalancing away from U.S. equities, and this will lead to a very, very sharp sell-off.  For the time being, investors are happy with the prospect of lower rates, a resilient labor market, and good earnings from market leaders.  Investors are comfortable ignoring the bigger picture risks that are looming – the fiscal debt bomb, the Fed as a political asset, and the loss of integrity of U.S. economic data. The scariest idea for investors would be the total politicization of the Fed, which would ultimately lead to aggressive monetization to keep funding our nation’s growing debt burden.  We have seen how this works out in many cases, and it is ugly.  Think runaway inflation and an economic crisis that dwarfs anything seen before. 

Last week we reiterated our aggressive call to stay long gold – and buy more on dips.  This is working perfectly.  Gold has rallied strongly, and it is coiling for a move to take out the $3500 level.

We also reiterated our call to stay short the U.S. dollar.  Since Powell’s talk at Jackson Hole, the dollar has been under significant pressure.  The Australian dollar, British pound, Swiss franc, and yen have all rallied nicely.  Over the coming weeks, there should be much more to follow.

In the meanwhile, I want to wish you all the very best of luck with your trading.

Andy Krieger