Trump’s push to remove Federal Reserve Governor Lisa Cook is heightening fears of stagflation, according to Komal Sri-Kumar, president of Sri-Kumar Global Strategies.
For wealth advisors and RIAs, this development underscores the importance of closely monitoring political interference in monetary policy and its potential market consequences.
Sri-Kumar argues that the worst-case scenario for the U.S. economy—stagflation, where inflation rises while growth slows—is becoming increasingly plausible. While a typical recession gives the Fed flexibility to cut interest rates and stimulate activity, stagflation ties policymakers’ hands. With inflation running hotter, aggressive rate cuts risk fueling further price pressures, leaving the economy stuck in a difficult middle ground.
At the heart of the current concern is Fed independence. The move to oust Cook, a sitting governor with years left on her term, would be an unprecedented intrusion into central bank governance. Sri-Kumar believes that if Cook is removed, markets will interpret it as a sign that monetary policy is being politicized, undermining confidence in the Fed’s ability to contain inflation. In such a scenario, investors may sell Treasurys, driving yields higher and tightening financial conditions—precisely the opposite outcome the Trump administration might desire.
“We are moving toward stagflation—a situation where recession coincides with inflation picking up significantly,” Sri-Kumar warns. “The only way to prevent it is to restore Fed independence. But at the moment, that prospect seems unlikely.”
Bond Market Signals
The bond market is already flashing red. On Tuesday, the 30-year Treasury yield spiked, reinforcing the idea that investors are preparing for sustained inflationary pressure. Rising long-end yields matter for advisors and their clients because they flow directly into higher borrowing costs for mortgages, corporate debt, and other long-term financing needs.
Sri-Kumar outlines three key interpretations of higher long-end yields:
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Inflation expectations rising. When long-term yields climb, it suggests investors believe inflation will remain unanchored. The Fed’s decision to begin cutting rates in September of last year, even as inflation persisted, was described by Sri-Kumar as a “serious mistake” that fueled these expectations.
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Slowing economic growth. Higher yields tighten capital availability, raising the cost of credit and putting pressure on consumption and investment. This can dampen economic activity even as inflation persists, worsening the stagflationary mix.
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Market distrust of Fed credibility. If political interference weakens the Fed’s perceived ability to manage inflation, yields will adjust upward to reflect that loss of confidence.
Triggers That Could Push Yields Higher
Several scenarios could accelerate the trend of rising long-term yields:
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Cook’s removal. Forcing out a Fed governor would signal erosion of central bank independence, a move likely to rattle bond markets.
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Wider Fed reshuffle. If Trump replaces additional Fed policymakers with dovish voices inclined toward looser monetary policy, markets may assume inflation will be allowed to run hotter.
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Rate cuts despite sticky inflation. If the Fed cuts rates in September while its preferred inflation measure—the Personal Consumption Expenditures index—remains elevated, yields could spike further as investors question whether inflation is truly under control.
Tariffs and Policy Uncertainty
Tariffs represent another stagflationary risk. By raising import prices, tariffs feed consumer inflation while simultaneously weighing on trade and global growth. For wealth advisors, this dynamic is critical: tariffs may boost certain domestic producers in the short term, but the broader impact on consumer spending power and capital markets is negative.
Sri-Kumar has been cautioning about stagflation for years, arguing that the Fed should have maintained a more restrictive stance on interest rates rather than pivoting prematurely to cuts. In his view, the central bank’s attempt to stimulate growth without fully quelling inflation only raises the risk of a policy misstep.
Implications for Advisors and Clients
For RIAs and wealth managers, the risk of stagflation poses several challenges:
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Portfolio positioning. Traditional equity-bond diversification may fail in a stagflationary environment. Both asset classes can suffer as growth slows and inflation erodes real returns.
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Inflation hedges. Advisors may need to consider increased allocations to real assets, commodities, or inflation-linked securities.
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Client communication. Explaining the unique risks of stagflation—why it is harder to address than a recession—is essential for maintaining client trust and preparing them for potential volatility.
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Policy watching. Advisors must stay attuned not only to Fed decisions but also to political maneuvers that could threaten central bank independence and credibility.
The emerging consensus is clear: weakening Fed independence risks destabilizing markets and fueling stagflation fears. For advisors, the key takeaway is not simply to react to immediate market moves but to recognize the deeper structural risks at play. If long-term yields continue rising and inflation expectations become entrenched, the traditional playbook of relying on monetary policy support during downturns will no longer hold.
In such an environment, proactive risk management and careful reallocation strategies will be vital. While the outlook remains uncertain, Sri-Kumar’s warning serves as a reminder that political interference in monetary policy can have far-reaching consequences. Advisors who anticipate these dynamics and guide their clients accordingly will be better positioned to navigate a stagflationary future.
