Three powerful forces that could destabilize financial markets

There’s a growing sense that the macroeconomic puzzle is beginning to take shape. While it is already stirring concern in the U.S. bond and housing markets and contributing to weakness in the U.S. dollar, the equity market has so far remained largely unaffected.

Overall, we at TriVest Wealth Counsel are watching three powerful forces converge, each with the potential to destabilize U.S. and possibly global financial markets and reshape the investment landscape.

First, the U.S. fiscal deficit continues to run unchecked. Even outside of recessionary periods, the government is operating with deficits in the range of six to eight per cent of GDP. To manage the mounting interest costs, the Treasury has leaned heavily on issuing short-term debt, flooding the market with supply. This strategy may offer temporary relief but it exposes the government to rollover risk and leaves bond investors demanding higher yields to compensate for inflation, fiscal uncertainty, and the sheer volume of issuance. The bond market is beginning to push back, and long-term yields are rising in response.

Second, the independence of the Federal Reserve appears to be under threat. U.S. President Donald Trump has made clear his intention to exert control over the Fed, most recently with his attempt to remove Governor Lisa Cook and his public criticism of Fed Chair Jerome Powell. If Trump is able to install loyalists on the Fed Board, he could secure a majority by early 2026. This would mark a dramatic shift in how monetary policy is conducted. Rate decisions could become politically driven, with pressure to cut aggressively even in the face of rising inflation and long-end yield spikes. The Fed’s credibility, long anchored in its autonomy and commitment to price stability, would be at risk and markets could push back with added volatility and uncertainty.

Third, there is the risk that this turns into the early stages of a pivot toward Modern Monetary Theory (MMT) style policy. In this scenario, the Fed begins to monetize deficits directly, buying Treasuries to cap yields and support fiscal expansion. Yield curve control returns and direct purchases of mortgage-backed securities resume. Interest rates are held artificially low to ease debt servicing costs and sustain government spending. While this may seem like a pragmatic solution in the short term, history offers sobering lessons about the dangers of fusing fiscal and monetary policy under a centralized authority.

Consider Weimar Germany in the early 1920s where the government printed money to pay war reparations and fund deficits. Hyperinflation spiralled out of control, prices doubled every few days and the mark collapsed. The trauma of that period still shapes Germany’s obsession with price stability today.

More recently, Turkey under President Recep Tayyip Erdogan experienced similar dynamics. Erdogan insisted that low interest rates would reduce inflation, defying economic orthodoxy. The central bank lost independence, governors were fired for hiking rates, and inflation soared to 85 per cent. The Turkish lira collapsed and even after orthodox reforms were introduced, investor confidence remained fragile.