Trump's attempt to fire Lisa Cook makes stagflation in the US more likely, strategist says

The worst-case scenario for the US economy may have just inched a bit closer.

Komal Sri-Kumar — the president of Sri-Kumar Global Strategies — is blaming President Donald Trump’s latest escalation of his feud with the Federal Reserve, which saw the president attempt to fire Fed Governor Lisa Cook on Tuesday.

Sri-Kumar said that the odds of stagflation, a dreaded scenario where inflation heats up while growth in the economy slows down, are higher now.

He pointed to the recent rise in long-term yields in the economy, which he sees as a sign investors are bracing for more inflation in the future. Paired with signs of a sluggish economy, a stagflationary dynamic is brewing, Sri-Kumar said.

The overwhelming consensus has been that the removal of Cook — which has little historical precedent — would further erode the independence of the central bank. Sri-Kumar says the market will rebel against any further progression of Cook’s removal by dumping bonds and pushing up yields, which is actually the opposite of what Trump wants.

“We are moving toward stagflation, a situation when you have a recession, at the same time, inflation picking up significantly,” Sri-Kumar said. “What can prevent it? Change the policy immediately. Go back and allowing the Fed to be independent. But we don’t see any prospect of that happening,” he added.

Warning in the bond market

Stagflation is often thought to be an even harder problem for policymakers to solve than a traditional recession. That’s because the Fed, hindered by hotter inflation, is unable to lower interest rates to boost the economy, as it would in a typical downturn. It might even rates them.

The bond market has already been sending signals of caution, with the 30-year yield spiking on Tuesday.

Here’s what higher long-end yields mean, in Sri-Kumar’s view:

• Higher inflation expectations. When long-term yields rise, it’s a sign that investors don’t believe inflation is anchored, causing them to price in higher interest rates over the long run.

  That explains why long-end yields jumped as the Fed began its rate-cutting cycle in September of last year, Sri-Kumar said. He called the move a “serious mistake.”

• Risk to economic growth. Long-term yields are tied to borrowing costs across the economy, like mortgage rates. In that respect, higher yields could impact economic activity, as capital becomes tighter.

There are several scenarios that could trigger a rise in long-term yields, Sri-Kumar said:

• If Lisa Cook ends up being fired. Economists say such a move could chip away at the credibility of the Fed and its perceived ability to keep inflation under control.
• If Trump replaces more central bankers. If the president were to plug in more dovish policymakers at the Fed, that could put more pressure on the central bank to loosen monetary policy, Sri-Kumar added. The move could spark more concern in markets that inflation is becoming unanchored.
• The Fed cuts rates in September despite higher inflation. If Personal Consumption Expenditures inflation, the Fed’s preferred inflation measure, comes in hotter than expected, that means the Fed trimming its interest rate level in September as expected could also spike long-end yields, Sri-Kumar said.

Economists have warned of the risk of stagflation for months, particularly as Trump’s tariffs loom over the US economy. Tariffs are thought to raise prices for consumers while hindering global trade, which could hurt economic growth.

Sri-Kumar, for his part, has warned of the risk of stagflation for the last several years. In February, several months after the Fed began its rate-cutting cycle, he said he believed the central bank should continue hiking interest rates in order to keep inflation under control.