Blain’s Morning Porridge January 12th, 2026: Rolling the Dice on the Fed And Inflation
“Luck, if you’ve ever been a lady to begin with, Luck be a Lady tonight.”
Trump has shattered conventions on politics and diplomacy so why not financial markets as well? The Show Trial of Jerome Powell will see Trump seize the levers of monetary policy. For markets its dead simple – what will it mean for the economy and the rising prospects of a Stagflationary Bust in the US?
You can’t help but wonder about markets…. Are they actually paying attention? Last week, amidst the hurly burly of foreign entanglements, US stocks hit record highs before settling back but then rallied again as job creation in the US economy slowed – thus justifying further easing. There feels to be a somewhat Pavlovian reaction to liquidity and price these days as markets anticipate sustaining rate cuts.
On Friday I asked a rhetorical question: what will Trump do next week? Now we know. Add political Witch Hunts to the charge sheet against him. He’s broken every rule in politics and diplomacy, so why not in financial markets also…?
What is likely to happen next is becoming clearer.
This morning markets will open to the news Federal Reserve Head Jerome Powell is under criminal investigation for the unforgivable crime of denying the President the swift interest rate cuts he has repeatedly demanded. It will be show-trial pure and simple. Despite the charges against Powell overturning everything we’ve come to base modern finance upon, (the independence of central banks and the detachment of politicians from the reigns of monetary policy), Trump will seize de-facto Fed Power at some point in the next few months. Markets will be pricing for that reality.
Powell has made clear he intends to contest the charges against him – which allege he lied over this congressional testimony on the Federal Reserve Building’s renovation. In a feisty response on Sunday, he defined the fight as: “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.”
Whatever happens, Trump looks set to take over rate setting later this year. It will raise massive implications for the dollar, US debt and the economy, but particularly in terms of rising inflation risks. Some Trump supporters – who genuinely believe Trump is a genius and has surrounded himself with similar – believe it will prove another magnificent MAGA triumph. Sure, they know better than Fed experts.
Many in markets – especially in bond markets where participants tend not to believe six implausible things before breakfast – will be privately shocked. Yet, most will simply accept it as fait accompli and get on with trading the changed risk environment and rising political volatility. They will factor increased inflation risks into their algos and prices. My first guess is the yield curve will steepen. My second thought is to stay long Gold (which hit a new record high this morning.)
Trump is clearly emboldened and on a lucky streak after his (apparent) success in Venezuela. Should the regime in Iran tumble this week it will only increase his certainty. Yet, every time Trump rolls the dice, he is betting large and lose with another massive risk to the US and Global economy. Changing the monetary policy basis of US markets, even as the last 80 years of exorbitant dollar privilege and the mighty Treasury market are tested – could severely impact markets.
As I wrote last week, the cumulative chance that a succession of policy errors and Trump’s repeated crap rolls are suddenly exposed, and turn sharply negative, could trigger a cascading market crash and a stagflationary economic downturn. An inflationary bust will be destructive, messy and compounded by rising geopolitical conflict – which itself increases as a risk as a result of Trump’s successes upsetting the Chinese. (The Russians? Mere bit-players.)
Powell has intimated he intends to complete his term – which expires in May. His successor is likely to be Kevin Hasset, who Nancy Pelosi has described as a sock puppet! He may be announced as early as this week – although it may take longer to get him confirmed by the gridlocked Senate Banking Commission, where in a sign of things to come, Republican Thom Tillis has proved courageous enough to push back on Trump.
The new Fed Head in waiting’s first act will likely be to renewed calls for the immediate sacking of Governor Lisa Cook over mortgage fraud accusations. (As a supporter of Powell, she is clearly guilty till she proves her innocence.) If she is removed, it will give Team Trump control of the Fed, and the prospect of immediate interest rate cuts feeding into the economy.
Some believe lower rates and plentiful liquidity will trigger a repeat of 2010-2023 – the QE era. We learnt then setting interest rates low and pumping the economy with liquidity did not result in a massive building boom of plant, factories, and infrastructure, but triggered companies to leverage up to mount stock buybacks. Financial asset prices soared even as the economy flatlined. What was critical was what it looked like – soaring stock markets, happy investors and a feel-good economy based on financialisation rather than real growth.
Trump will be hoping for dramatically lower rates to kick-in ahead of the midterms. What’s not to like about soaring stock markets? He’s hoping to campaign on the optics of a better-looking economy, plus his acumen in foreign entanglements. It’s no wonder he doesn’t want to talk about the cost of living or affordability.
But… the other lesson of the QE era is more subtle and may have been missed by Trump and his minions: Inflation. In 2010-2020 there was almost zero inflationary momentum from the massive amounts of liquidity pumped into the economy. The inflation spike was first felt in the Covid pandemic, and then clearly from Ukraine.
Inflation wasn’t a threat in the prior decade due to ongoing slowdown, recession and diminished business sentiment post the Global Financial Crisis of 2008, but largely due to Chinese manufacturers exporting deflation because of its expanding role as the maker of everything the global economy wanted to buy. Even as liquidity flowed into financial assets, prices stayed low on plentiful supply.
Today, the outlook for an inflationary bust on the back of cheap interest rates is massively different. Supply chains are less resilient. Geopolitics have turned sharp. The contest for global hegemon is in full bore.. and inflation is now a very real threat.
Before I finish this morning… last week’s news was dominated by a slew of Trumpian motions… with more solids set to hit the fan. As I write there are stories the Americans are in Iran… Regime change in Iran will be a defining moment, but it all depends on what follows; better or worse. I am concerned – we remember the Persians as a cultured people with a rich history, but so were the Russians before the Revolution… and look what followed when that unravelled. For nearly 50 years revolutionary Islam has dominated the economy which is generally young and knows little else.
Out of time, and back to the day job.
CEO – Windshift Capital
Author – The Morning Porridge
Partner – Shard Capital
Special Advisor – Spitfire Strategic Capital
