The week was meant to be about inflation data in the US. The PCE deflator—the Federal Reserve’s preferred gauge—was published, but it barely registered a ripple. What dominated instead were legal defeats, political resignations, tariff confusion, and a failed attempt by President Trump to pressure the Fed. For economist Dr Komal Sri-Kumar, the signal is clear: the United States is drifting into stagflation, and markets are being asked to navigate in the dark.
The most dramatic shift came from the US Court of International Trade, which ruled that the President had overstepped his authority by imposing a wide range of tariffs. Though the administration quickly appealed and won a temporary stay, the future of those levies is uncertain—and that uncertainty has consequences. “It weakens the hands of US trade negotiators,” Sri-Kumar notes, pointing out that foreign counterparts now have a strong incentive to stall talks and wait for the US judiciary to resolve the matter in their favour.
The timing couldn’t be worse. Only weeks ago, Treasury Secretary Scott Bessent had returned from Geneva after negotiating a temporary 90-day truce with China. But the President’s tone has shifted. On Truth Social, he accused Beijing of violating the deal and hinted at retaliation. “So much for being Mr. NICE GUY!” he wrote. Sri-Kumar sees a pattern: “A tariff deal is always subject to change by the President at a moment’s notice.”
For markets, this is an instability tax. The constant flux on trade policy creates supply chain delays, raises costs, and keeps Treasury yields high. “Markets are likely to remain volatile due to lack of clarity on what the ultimate outcome would be,” Sri-Kumar warns. Without durable policy direction, pricing, production, and investment decisions remain trapped in limbo.
As if that weren’t enough, Trump faced another setback with the resignation of Elon Musk, head of the Department of Government Efficiency (DOGE) and a prominent campaign backer. The department had been pitched as a mechanism to trim wasteful spending and rein in the deficit. But with the “Big Beautiful Bill” now passed by the House—extending tax cuts and expanding defence and border spending—Musk is reportedly disillusioned. In an interview to air on CBS Sunday Morning, he is expected to express frustration with the widening fiscal gap.
The irony is sharp. Just as Washington confronts a credit downgrade and soaring interest costs, it is doubling down on expansionary fiscal policy. Sri-Kumar has previously warned about the long-term dangers of this approach. Now, with trade policy fraying and revenue uncertain, the risks are beginning to crystallise.
That may be why Trump turned his attention to the Fed.
On Thursday, the President met with Jerome Powell at the White House. It was an unusual summit—especially given Trump’s recent tirades against the Fed Chair, whom he has called a “fool” and a “major loser.” But the meeting yielded no victory. The central bank swiftly clarified that Powell made no promises. Decisions on interest rates, the Fed said, would be based on “careful, objective and non-political analysis.”
It was not the response Trump had sought.
“The President did not get the relief he had sought,” Sri-Kumar writes. The Fed remains committed, at least publicly, to policy independence. Whether it can maintain that stance through a volatile election year remains to be seen.
What does this all add up to?
Sri-Kumar offers a blunt diagnosis: “Policy reversals on the trade and Big Beautiful Bill fronts make it a trader’s market rather than one friendly to the long-term investor.” In other words, stability is gone. Decision-making is erratic. And economic fundamentals are deteriorating. “Last week’s developments increase my expectation of the onset of stagflation,” he concludes.
Inflation pressures remain. Growth is wobbling. Confidence in leadership—fiscal, monetary, and administrative—is cracking. For long-term investors, that’s not a cycle. It’s a warning.
This article quotes views expressed by Dr Komal Sri-Kumar in his weekly commentary. These are his personal opinions and not financial advice. Always consult a qualified adviser before making investment decisions.
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