Today’s Federal Reserve’s decision to cut interest rates and restart Quantitative Easing (QE) places it on a path of ‘easy money’ that is increasingly isolated globally. While the Fed focuses on protecting employment, the global financial system is signaling major inflation concerns, a trend that longer-term could threaten the stock market.

Warning Signs

• Global Banks Stand Firm: In sharp contrast to the Fed, central banks like the Bank of Canada (BoC), Reserve Bank of Australia (RBA), and Reserve Bank of New Zealand (RBNZ) are holding rates steady. Furthermore, the European Central Bank (ECB) is even signaling a risk of a rate hike in 2026, defying expectations of easing due to stubborn price pressures.
• The Bond Market Revolts: Longer-term rates, such as the 10-year Treasury yield, are rising despite the Fed’s short-term cuts. This means the bond market – where capital is priced for the long term – doesn’t trust the Fed and is demanding higher interest to compensate for persistent, future inflation. This keeps borrowing costs high for consumers and companies, undermining the entire easing effort.

• Looming Inflation Increase: The US inflation story could certainly worsen with an expected nomination of an even more dovish Fed Chair and proposals for new, massive fiscal spending (like $2,000 cheques). This combination of monetary and fiscal stimulus creates the perfect recipe for higher prices.

What This Means for Retail Investors

The old rule that ‘Fed easing equals to a stock rally’ may be challenged – LONGER TERM –  because the benefit of cheaper money may be eaten alive by inflation.

• Stocks Face a Headwind: If QE and cuts lead to persistent inflation, the stock market will struggle. Rising prices reduce consumers’ buying power and squeeze company profits because they can’t always pass every cost increase on to strapped customers.
• Don’t Rely on the Fed Alone: The rising cost of long-term capital (set by the bond market) proves that relying on the Fed’s short-term rate cuts alone will not lead to broad, easier financial conditions.

Action Plan: Diversification is key. Instead of betting on a universal stock rally, consider including exposure to assets that can historically withstand high inflation, such as:

• Hard Assets: Precious metals, Commodities (like Energy and Materials) and Real Estate (REITs).
• Companies with Pricing Power: Businesses that can raise their prices without losing customers (eg, certain Consumer Staples or Healthcare).

Stay tuned!