The Feds Can’t Save You

Every investor is watching Jerome Powell. Again.

Powell’s term expires in May 2026. Chances Trump extends it? Near zero.

Trump and Treasury Secretary have pivoted away from debt reduction to growing GDP to outrun debt growth. That’s inflationary.

But here’s the thing: the Fed is no longer the fail-safe. With war, debt, and political chaos on every front, the Fed is playing defense, not offense. The old playbook of “watch the Fed, ride the market” is broken. It’s different.

Here’s what’s changed:

• Bond vigilantes are back. The market is calling BS on unlimited stimulus.
• Geopolitical tensions are now investment risk factors, especially in energy and commodities.
• The debt isn’t just a number. It’s a future tax. And markets know it.

Let’s take a deep dive into these issues

Source: U.S. Treasury

• Rising Interest Payments: The U.S. government’s annual interest payments on debt have surpassed $1 trillion, exceeding expenditures on major programs like defense and Medicaid. This surge raises concerns about the sustainability of fiscal policies.
• Elevated Treasury Yields: Yields on 30-year U.S. Treasury bonds have climbed above 5%, the highest since 2007, indicating decreased demand and heightened risk premiums.
• Persistent Inflation Risks: Despite some moderation, inflation remains a pressing concern. Federal Reserve officials have expressed caution, emphasizing the need to maintain current interest rates to combat ongoing inflationary pressures. The new normal is going to 3%—a likely condition for the next Fed chair to sign off on.
• The Fed faces an unprecedented dilemma:
  • Traditional toolkit: higher rates cool the economy
  • Today’s debt levels do the opposite: increased rates => higher GDP
  • Stock market gains and IRA withdrawals fuel federal receipts
  • Falling receipts drive deficits
  • The Fed has to support the stock market, but how?
  • Yield curve control is coming
• Geopolitical Tensions: Escalating trade disputes and geopolitical conflicts are contributing to economic uncertainty, affecting global supply chains and investor confidence.

Implications for Investors:

The confluence of these factors suggests that traditional investment strategies may require reevaluation. Relying solely on conventional asset allocations could expose portfolios to heightened risks in this evolving economic landscape.

60/40 meant bonds outperformed when stocks went south—an allocation hedge. Bond vigilantes still act as a brake on policy excess, but we have entered a structural bear market in bonds.

Bonds may offer short-term trading opportunities as a temporary refuge from market panic, but those trades don’t last.

If your portfolio is still built around the Fed as your safety net, it’s time for a wake-up call.

Sure, the Fed has to backstop the stock market, but you have to know when and how.

Want to build an allocation strategy that actually protects your capital? Book a strategy call with Dakota Ridge Capital.

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