The finance minister has ignited market fears with dubious engineering to curb borrowing costs, the president has offered cash inducements to vote for the ruling party in upcoming elections, the regime is engaged in voter suppression, and there is executive pressure on the central bank to cut interest rates.

This kind of language was once more suited to research notes on risky emerging markets than the world’s sole superpower. But times have changed.

America boasts unrivalled corporate ingenuity, the deepest and broadest capital markets, and the world’s only reserve currency. But on the policy front, President Donald Trump’s second term has torn up the rules-based order in ways that are beginning to have significant economic consequences.

With inflation remaining stubbornly high, Federal Reserve Chair Kevin Warsh and the rest of the FOMC membership represent the last pillar of credibility left standing – and to that end, they must raise interest rates next week.

This has gone well beyond the typical fundamentals that currently point to a 74% probability of a 25bps hike in the current 350-375bps target rate, as tracked by CME FedWatch.

It’s true that August’s CPI release tomorrow (11 September) could yet surprise on the downside. But today’s PPI print for last month is a doozy at 5.4%. Meanwhile, the PCE index stood at 3.7% in July versus the Fed’s 2% target, the ongoing Iran conflict is pushing diesel towards USD 6.00 a gallon (a decent leading indicator that goods prices will jump), the jobs market is hot, and gold is rising – with both the dollar and Treasuries out of favor with investors.

The latter is unsurprising. Treasury Secretary Scott Bessent’s faltering efforts to flatten the yield curve by attempting to shore up the Japanese yen and buying back long-dated Treasury paper have served only to spook markets. The widespread feeling is that absent real fiscal consolidation, Bessent’s maneuvering bears more hallmarks of a vaudeville illusion than considered macro policy action.

He seems to have leaned into the theatrics a little this week. “I have asymmetric information. I am the house now,” Bessent bragged at an event in Texas. “You can bet against me if you want.”

Plenty of investors did exactly that, with the 10-year Treasury yield hitting a high of 4.9%, on par with an inflation-related spike briefly touched in 2023, which was itself a post-financial crisis high.

Compounding that, President Trump’s cratering approval ratings have seen him emerge swinging with characteristic pugnacity in midterms campaigning, while unleashing rhetoric that can only be considered desperately unhelpful to his hapless Treasury Secretary and a wavering FOMC.

Speaking to yesterday’s (9 September) GOP convention, Trump said: “If the Republicans win the House of Representatives and the United States Senate, both of them, because of our economic – tremendous economic success – like, in history we’ve never had anything like what’s happening. But because of our tremendous strength and success economically, I will issue a dividend to every adult citizen in the United States of America for USD 5,000.”

You get the gist.

This would amount to a stimulus of at least USD 1tn.

Now, Trump has made “tariff dividend” pledges before. And neither the GOP nor Democrats are immune from reckless fiscal posturing that could steepen the rate curve, as this column warned back in May.

No doubt Warsh and the FOMC would prefer to stay away from controversial decisions with the midterms less than two months away.

But rising inflation expectations, reflecting geopolitical mismanagement and repeated policy failures, demand a firm intervention from the Fed.

Sponsors, lenders and corporates that had long ago torn up their hopes for a series of rate cuts from major central banks this year as soon as bombs began falling on Iran are already feeling the pinch.

One chair of a bulge bracket investment bank franchise told Continental Drift that the shift in recent weeks from private equity partners sharing financing fears to executives at major investment grade multinationals also singing the same tune was remarkable.

Why? “The US is a clown show,” he said.

Until now, AI exuberance had papered over many of the cracks. In the deals space, NVIDIA’s USD 12.9bn takeover of AI developer tools player Hugging Face and the fevered race between Anthropic and OpenAI to undertake IPOs highlight the scale of capital betting on this technology to fundamentally reshape our world.

This enthusiasm has supported US stock market performance and turbocharged private credit issuance backing data center rollout.

Neither those with AI interests nor sponsors more broadly will welcome Fed rate hikes. Maybe an increased cost of capital will be the short-term trigger for a correction on AI-related valuations many see as having overshot. It would certainly impact wider deal sentiment out to year-end and into 2027.

But the alternative – long-term capital costs rising inexorably amid fears no one in Washington DC has the credibility to tame inflation – would be ultimately far more damaging for corporates, investors and Main Street alike.

The ball is now firmly in Warsh’s court, no matter how much he may wish to not be in the game at all.

Continental Drift is a weekly column offering commentary on the macroeconomic, political, and policy forces shaping the M&A landscape across the US and Europe. The opinions expressed here are those of the writer only.