Have you ever watched a party that everyone swore would never end suddenly turn into the mother of all hangovers?
That’s exactly the vibe I got yesterday when the betting odds flipped overnight and a former Trump economic advisor suddenly became the favorite to run the world’s most powerful central bank.
The markets, of course, threw a rave. Stocks ripped higher, bonds rallied, gold touched another record. The usual reflex when someone whispers “rate cuts are coming sooner and bigger than you think.”
But the longer I stared at the screen, the more this felt less like a celebration and more like the opening scene of a horror movie where everyone is laughing right before the lights go out.
A Changing of the Guard That Feels Anything But Normal
Let’s be honest — central bank transitions are usually sleepy affairs. A well-groomed economist gives a measured speech about data dependence, markets shrug, and life goes on.
This time feels different. Very different.
The name now leading the pack isn’t some obscure academic with a stack of obscure papers. It’s a battle-tested political operative who has spent the last several months arguing — publicly and repeatedly — that rates are still far too high and should be coming down immediately.
And not just coming down a little. The signal from parts of the incoming administration is that they want aggressive, front-loaded easing. The kind that makes 2019 look disciplined.
Why the Market Loves It (For Now)
Look, I get the excitement. Lower rates mean cheaper borrowing, higher asset prices, and a general sugar rush across risk markets.
Since the election, the S&P 500 is already up double digits in a matter of weeks. Small caps are on fire. Crypto is acting like 2021 never ended. The animal spirits are fully awake.
- Corporate borrowing costs drop
- Homebuilders rally on cheaper mortgages
- Private equity deal flow picks back up
- Every carry trade known to man gets juiced
It’s easy to see why traders are pounding the buy button. In the short run, this movie has a happy ending written all over it.
The Part Everyone Seems to Be Forgetting
Here’s the thing nobody wants to talk about when the music is blasting: we’ve already run this experiment. And it didn’t end well.
Cast your mind back to late 2020 and 2021. The Fed was holding rates at zero, buying $120 billion of assets a month, and insisting inflation was “transitory.” Fiscal policy was dropping literal trillions from helicopters.
The result? CPI eventually hit 9.1%. The Fed had to slam on the brakes with the most aggressive hiking cycle in decades. Markets cratered. A lot of people lost a lot of money.
We are not even thinking about thinking about raising rates.
– A famous central banker, 2021
Sound familiar? Because some of the rhetoric I’m hearing today has that same eerie ring to it.
The Inflation Math Is Still Ugly
Let’s do some quick, back-of-the-envelope math that surprisingly few people seem willing to do right now.
The incoming administration has made it clear they want:
- Tax cuts (more fiscal stimulus)
- Tariffs (upward pressure on import prices)
- Deregulation (supply-side boost, but takes years)
- Mass deportation (potential labor supply shock)
- Higher energy production (deflationary long-term, but short-term constraints exist)
Now layer on top a Federal Reserve that’s cutting rates aggressively because the White House wants it to.
In my experience, when you combine loose monetary policy with loose fiscal policy and supply-side friction, you don’t get “soft landing.” You get inflation.
Sometimes a lot of it.
Central Bank Independence Isn’t Just a Catchphrase
One of the least appreciated truths in modern finance is that the Fed’s credibility is a huge part of what keeps inflation expectations anchored.
When markets believe the central bank will do whatever it takes to keep inflation near 2%, they price assets accordingly. Bonds yield less. The dollar stays strong. Gold doesn’t moon.
But when that belief starts to crack — when people think the Fed has become just another political actor — everything changes.
The Federal Reserve is independent… until it isn’t.
We saw it in the 1970s. Multiple Fed chairs bent to political pressure. The result was a decade of stagflation that scarred an entire generation of investors.
I’m not saying we’re there yet. But installing a chair explicitly chosen for willingness to cut rates rapidly feels like a step down a path we really don’t want to walk again.
What the Bond Market Is Quietly Telling Us
While stocks party, something interesting is happening in fixed income.
Long-term Treasury yields have been creeping higher since the election — exactly the opposite of what you’d expect if the market truly believed in a dovish paradise forever.
That’s the bond market pricing in higher growth, higher deficits, and yes — higher inflation.
Gold breaking out to new all-time highs isn’t a coincidence either. Smart money often moves before the crowd figures it out.
Possible Outcomes — None of Them Boring
So where does this leave us? Here are the scenarios I see playing out:
- Best case: Growth roars, supply chains heal, tariffs are lighter than feared, and the Fed threads the needle. Soft landing 2.0.
- Base case: We get re-accelerating growth but also re-accelerating inflation. The Fed cuts a few times, then has to pause or even hike again by late 2026.
- Worst case: Political pressure overwhelms data dependence. Inflation expectations unanchor. The Fed loses credibility. We’re talking 1970s redux, complete with volatility and eventual painful tightening.
Personally, I think we’re headed for door number two. But even that comes with plenty of turbulence.
How I’m Positioning Right Now
Full disclosure — I’m not fighting the tape. The trend is up, liquidity is abundant, and momentum is a powerful force.
But I’m also not pretending the risks have disappeared.
My book is tilted toward things that do well in a reflationary environment: energy, materials, financials, bitcoin, and yes — some gold.
Long-dated fixed rate bonds? Not touching them with a ten-foot pole right now.
Cash yielding 4%+ still feels like free money while it lasts.
Look, maybe I’m wrong. Maybe the economy really can grow at 4% with 4% inflation and everyone just decides that’s the new normal and moves on.
But history suggests that once the inflation genie gets out of the bottle, putting it back is rarely clean or painless.
The market is pricing in the best-case scenario today. That’s what bull markets do.
Just don’t be shocked if, somewhere down the road, the bill for all this easy money comes due.
Because in finance, as in life, there’s no such thing as a free lunch. Only borrowed time.
