• The US Federal Reserve has a controversial history in handling economic crises, often resorting to money printing 

• Today’s macro environment depends on how the Fed and other central banks act

• Rather than allocating based on politics, Investors must take a macro approach to portfolio management

The post-COVID inflation surge is clear evidence that sharply rising consumer prices can spark outrage among households. Trillions of stimulus dollars thrown into the economy and mismanaged monetary and fiscal policy contributed to a four-decade high in the CPI rate. The result was dismal consumer confidence and an eventual revolt at the ballot box. Not only was the Biden/Harris administration tossed to the curb in the US, but electorates globally gave pink slips to incumbent leftwing parties. Of course, the US led the reckless policy charge, and we now likely face generational challenges to put the inflation genie back in the bottle.

Inflation angst is not a new phenomenon, however. It was apparent and downright debilitating in the stagflationary 1970s and at other periods of American history. The difference today is that our national debt has gotten out of control. Set to hit $40 trillion during President Trump’s second term thanks to post-COVID Biden policies, the ratio of US debt to GDP could hit 130% by 2034, according to Goldman Sachs. The Congressional Budget Office (CBO) projects a 200% debt-to-GDP ratio shortly thereafter. While the Department of Government Efficiency (DOGE) and hopes for a protracted period of strong economic growth under Trump’s policies could put a dent in the debt, the macro reality is that high debt and stubborn inflation are probably here to stay.

Goldman Sachs: Under our baseline assumptions, debt-to-GDP rises to 130% by 2034 

Source: Goldman Sachs

Apollo Global: Under current policies, government debt outstanding will grow from 100% to 200% of GDP

Source: Apollo Global

How hard is it to pay off the national debt? Well, only President Jackson in 1835 was able to make the US debt-free. The seventh President of the United States used surplus funds to balance the books, collecting millions of dollars via tariffs while selling large amounts of public land. Old Hickory also asserted his leadership by vetoing unnecessary spending bills and then distributing surplus funds to the states, many of which faced steep debts of their own.

The Birth of Central Banking in America

But even before the Jackson era of fiscal prudence, the monetary side of the economic ledger had its birth during the days of some of our Founding Fathers. The debate over central banking in the US began with a clash between Alexander Hamilton and Thomas Jefferson. Riffs between the two men often surrounded federalism, and whether control of the monetary system should be left to the states or the federal government. 

Hamilton favored strong national control; he championed the creation of the First Bank of the United States in 1791, believing it would stabilize and grow the young US economy. Jefferson, on the other hand, feared the broad might of such a financial power over a fledgling country. 

Andrew Jackson and the Bank War

The First Bank’s charter only had a 20-year life, though. Expiring in 1811, Congress voted against its renewal, but the costly War of 1812 revealed the need for a central monetary authority. So, the Second Bank of the United States was established in 1816, despite some claiming that it was an overreach by the federal government. Among its fiercest opponents was Andrew Jackson.

A populist member of the Democratic-Republican party, Jackson saw the Second Bank as a threat to ordinary citizens. During his fourth year in office, he vetoed the bank’s recharter, claiming that it put too much power in the hands of too few men. His victory in the so-called Bank War resulted in the dismantling of the Second Bank, returning power to the states. Jackson brought the national debt to $0 shortly thereafter.

The Federal Reserve Act of 1913

Federal debt held by the public as a percent of GDP remained very low for the next few decades, but the Civil War was costly, and debt to GDP jumped to more than 30%, a record at the time. Moreover, periodic financial panics later in the 19th century stirred worries about the country’s solvency, highlighting the perceived need for a more structured approach to managing both the money supply and the economic cycle. The Panic of 1907 was the last straw; in 1910, six men met at the Jekyll Island Club in Georgia to draft a plan to take over the nation’s banking system. The main participants were:

1. Nelson Aldrich: A Republican senator from Rhode Island and chairman of the National Monetary Commission, Aldrich’s daughter, Abby, was married to John D. Rockefeller II, connecting him to one of America’s wealthiest families.

2. Paul Warburg: A banker representing the interests of the Rothschild family and having ties to the Rockefeller and Morgan financial empires, Warburg was instrumental in drafting plans for the Fed and would later serve on its Board.

3. Frank A. Vanderlip: Another man conspiring with the Rockefellers, Vanderlip was a banker and journalist who was Assistant Secretary of the Treasury from 1897 to 1901 and was president of the National City Bank of New York (now Citibank) before, during, and after the Jekyll Island gathering.

4. Henry Davison: A senior partner at JP Morgan & Company beginning in 1909, Davison was also instrumental in crafting the Fed system.

5. Arthur Shelton: Aldrich’s private secretary and former Harvard University professor of economics.

6. A. Piatt Andrew: Assistant Secretary of the Treasury and a financial expert, Piatt Andrew was a member of the US House of Representatives from Massachusetts.

What’s a common thread among these gentlemen? You should notice that they had direct connections to the country’s wealthiest families and power-wielders of that era. These interest groups and their progeny had access to capital that they used to fund targeted ventures and consolidate power. The usually sleepy spot in the Georgia Golden Isles proved to be ground zero in 1910 for the Fed’s birth. T

     Also known as “The Creature from Jekyll Island,” the Fed has a history of manipulating the economy in hopes of averting deep recessions. Over time, their efforts have proved futile. Not only have economic contractions occurred, but the steady fall of the dollar’s purchasing power has worked to the detriment of the common man. 

Rather than being a voice of the people, the Fed operates as a cartel, transferring financial losses to taxpayers. Its policies repeatedly result in inflation, as was seen in 2021-22, and grant ample government liquidity for war. Rather than tamping down the boom-bust cycle, dependence on a fiat currency exacerbates economic instability. Today, the Fed works hand-in-glove with broader big-government agendas, including the International Monetary Fund (IMF) and the World Bank. 

Problems with the Federal Reserve: “I'm from the government, and I'm here to help.” 

     Like so many centralized programs, policies, and departments, the Federal Reserve System had all the best intentions. It was designed to decentralize banking activities and promote the country’s regional and collective interests. Upon its 1913 creation, it was given the authority to manage monetary policy, regulate private banks, maintain financial stability, and support banking services within the government and other institutions. 

Over time, from the Bretton Woods system to the Fed managing a fiat-based currency system, the Fed has shifted how it influences the economy. Recall that the Bretton Woods system was established in 1944, and it pegged the US dollar to gold at $35 per ounce. That worked for the most part until the early 1970s thanks to the US’s dominant military and financial position in the global economy following World War II. 

Then, in 1971, President Nixon abruptly ended the dollar’s convertibility to gold, effectively abandoning the Bretton Woods system. With the stroke of a pen, the US and global economy shifted to a fiat currency system – one not backed by anything more than government decree and mutual trust. The greenback also had no intrinsic worth after Nixon moved to ditch the gold standard.

A fiat currency system grants the Fed immense control over the money supply and interest rates. Without the anchor of gold’s backing, inflation and economic fragility became greater risks in a post-Bretton Woods world. The US dollar has, however, held as the world’s reserve currency, but it remains so without the reserve of gold. Keeping the buck at the top of the currency heap is the reality that we are the world’s biggest military force, and we are home to the most innovative thinkers and companies. Together, physical defense prowess and financial market leadership have replaced gold, but there are signs that our geopolitical power may be deteriorating.

The recent surge in gold and bitcoin prices points to skepticism about the current monetary system. The world order is in contention as alternative stores of value gain traction as hedges against potential instability in fiat currencies. The US dollar’s dominance is being challenged, and the Fed is now tasked with managing the monetary system, promoting policies that keep the US in charge among all developed countries, keeping inflation in check, and supporting the dollar’s strength. It’s a long list of macro tasks. Unfortunately, the Fed is fraught with criticisms, many of which are justified through history. Among the risks introduced into the economy after Jekyll Island and in wake of the 1971 end of the gold standard are:

1. Private Ownership & Conflicts of Interest

The Fed is often mistakenly thought of as an integrated arm of the government, but it is technically considered independent – private banks own shares in the regional banking system. Once again, this sounds great on paper, but the real-world results are conflicts of interest with former and current executives from major investment banks having a hand in policy. 

2. A Dangerous Lender of Last Resort

Moral hazard is an enduring potential peril with the Fed at the helm of the US banking system. The notion that there will always be a Fed backstop can cause short-sighted and risky behavior by market participants. If a bank CEO knows there will be a government safety net should a risky wager not pay off, then systemic risk grows economy-wide. As a lender of last resort, the Federal Reserve acts as a nefarious custodian of money.

3. Heightened Political Pressure

The Fed is notorious for allowing politics to mix with policy. How the Federal Open Market Committee (FOMC) goes about interest rate decisions and open market operations directly impacts the economy, particularly the health of small businesses. During election years, the Fed may succumb to implied or explicit pressure for political leaders. Nudges are even more direct during crises.

4. Inflationary Fractional Reserve Money Printing

As Dalio calls out, during economic turmoil, a central bank faces the choice of increasing the risk of default or printing money. It will always choose the latter. Even before a country’s back is against the wall, stimulative policies, including fractional reserve printing, breed inflation (and inflation, as we know, is a tax). As Milton Friedman said, “Inflation is the one form of taxation that can be imposed without legislation.” It’s little surprise that along with the establishment of the Federal Reserve, a national income tax was introduced in 1913.

5. Pressure from Nefarious Groups

Beyond domestic policy, the Fed coordinates with other central banks and international outfits that effectively globalize and socialize monetary policy. This concentration of economic power in the hands of unelected bankers sways other government decisions, ultimately undermining individual freedom and US sovereignty.

Free-Market Challengers to the Fed

While the Federal Reserve is more powerful than ever, its rise to prominence has not gone unchecked. The Austrian School of Economics, forged by thinkers such as Ludwig von Mises and Friedrich Hayek, pushed to abolish central banking. Hayek and John Maynard Keynes, a proponent of government intervention to stem macroeconomic turmoil, debated monetary theory in the 1930s. Keynes on the left and Hayek on the right underscored how politics and economics often clash. Hayek posited that credit expansion induced by central bankers may result in amplified business cycles; his concerns were confirmed decades later in 2008 when artificially low interest rates and monetary expansion contributed to the US housing bubble and burst. 

Von Mises and Hayek wanted to ditch central banking altogether, but other capitalist thinkers like Milton Friedman took a more measured approach. Friedman popularized the Monetarist Theory which asserts that changes in the money supply, not interest rates, influence national output in the short run and price levels over the long run. “Inflation is always and everywhere a monetary phenomenon,” argued Friedman. He pushed for a steady, rules-based, and disciplined expansion of the money supply rather than the discretionary approach adopted by the Fed.

Once again, in a perfect world of monetary policy, the discretionary method would work fine. Periodic stimulus and restrictions would effectively manage the money supply and inflation. It is seen time and again, however, that policy missteps happen. During the inflationary period of 2022 and the years thereafter, Chair Powell even relayed to the market and households that the Fed “navigates by the stars under cloudy skies,” meaning they at best use backward-looking data to determine policy and at worst are guessing at what the right policy should be. That approach sometimes leads to a dangerous flirt with deflation and, more commonly, prolonged long-term battles with elevated inflation.

According to Friedman, when the Fed increases the money supply, the macroeconomy becomes unstable. Too many dollars chase too few assets, be they physical or financial. Things turn too expensive, and stocks and bonds are prone to balloon in nominal value. When people see their portfolios swell, they spend more, passing along money to others. Asset prices rise further, which works to the detriment of certain parts of society. Eventually, an uprising may occur, leading to the decline of a global power.

The Great Reset and Modern Monetary Policy

On the international stage, the World Economic Forum (WEF) advocated for extreme centralization through its “Great Reset.” The initiative was crafted in wake of the pandemic purportedly to promote sustainable development. WEF chief Klaus Schwab wanted fairer growth and used the ESG framework as a lattice to push a leftist agenda, counter to even the mildest free-market principles. 

“You’ll own nothing and be happy,” was its mantra, evoking fears of modern serfdom. ESG and other “woke” movements, like corporate DEI policies, began to be abandoned in the following years, but history proves that politics and monetary action can quickly become intertwined. Indeed, Hayek’s concerns nearly a century ago proved prescient in modern times.

Problems with Measuring Inflation Today

As if the Fed’s role wasn’t riddled enough with dubious relationships and motives, the very measures it uses to gauge inflation are flawed. The Fed targets 2% headline PCE (Personal Consumption Expenditure) Price Index inflation, but it also keeps a close watch on the core PCE rate and CPI trends. There have long been problems with how inflation is tabulated. CPI itself does not reflect the true impact of inflation on individuals and businesses, particularly those relying on credit to buy a home and purchase a vehicle, as it doesn’t fully factor in true interest costs. 

Former Treasury Secretary Larry Summers (not exactly a Friedman-style economist) found that real-world inflation spiked to 18% in 2022, not the high of 9.1% the government’s CPI gauge printed in June of that year. The published inflation rate was also suppressed by badly lagged shelter pricing data during President Biden’s first two years in office. Consumers faced 30%-plus cost increases at the grocery store and in other non-discretionary categories like home and auto insurance. Much of the CPI and PCE Price Index increases could have been avoided with a more judicious Fed policy.

Don’t Fight the Fed: Portfolio Strategy

Hindsight is 20/20, of course, and investors must now grapple with the prospect of higher inflation in the years and maybe decades ahead. Assets that can preserve purchasing power or even increase in real-dollar terms are more likely to be in favor. Think: gold, bitcoin, oil (and Energy-sector stocks), as well as TIPS in the bond market. 

Gold rallied to record highs in 2024 amid fears of macro financial instability brought about by soaring government debt levels. Bitcoin reached $100,000 following President Trump’s election in November 2024 and then notched new highs as he took office. As for oil, it was quiet over the back half of the election year, but then rose in early 2025 with the Energy sector leading the S&P 500 over much of January. Finally, breakeven inflation rates were on the ascent following the Fed rate-cutting cycle’s beginning in Q3 2024, resulting in TIPS posting alpha to comparable-term nominal Treasuries.

Some market participants are feeling sanguine about the inflation story. The December CPI report, released in mid-January, revealed that consumer prices are increasing at a slower rate compared to what was seen in the last few years. At 2.9% headline year-on-year (3.2% core), inflation is edging closer to the Fed’s 2% headline PCE target. Moderating wage gains and economic weakness in areas like Germany and China have helped to cap inflation at home, but the big picture paints a concerning backdrop. 

We are in a transition phase between market regimes. High volatility among asset classes is the new normal until there’s clear guidance on monetary and fiscal policy. As it stands, global economic policy uncertainty has soared to the highest marks since the COVID-19 market crash.

Economic Policy Uncertainty Index

Source: Economic Policy Uncertainty

Risk: Resurgent Inflation

Source: Apollo Global

This volatile macro backdrop underscores the importance of having a dynamic portfolio – one that houses a mix of risk-on and risk-off assets. Furthermore, holding cash for tactical plays is crucial since opportunities can arise quickly when volatility is elevated across asset classes and equity sectors. 

Macro Regimes: Connecting the Dots

Investors’ primary challenge in the current regime is managing risk around Fed policy and inflation. The task isn’t so much about accurately predicting what the FOMC decides every six weeks or how the headline and core CPI, PPI, and PCE numbers verify, but to assess probabilities and trends. The best hedge fund traders and risk managers are always connecting the macro dots to form an investment mosaic that can dampen portfolio volatility during declines while participating in bull market runs. 

Market regimes may persist for years and throughout stock market ups and downs. Quantifying intermarket relationships and asset-class correlations is important to navigating current challenges and pouncing on opportunities. The prominent factors driving price action may change from one regime to another, so it’s also imperative that you don’t rely too heavily on what worked in the previous regime (say, the 2009-2020 timeframe). 

2020 was certainly a crisis period, but a steadier state ensued once trillions of dollars of stimulus were poured into the global economy. 2021 was a mini-boom as interest rates remained low, inflation was not yet a concern, and stock and bond market volatility were modest. A new market condition began in 2022 – inflation. The CPI rate hit its highest level in 40 years which had negative implications for yield-sensitive areas like high-duration tech and regional banks. A bear market that year culminated with a spike in Treasury yields. Losses were halted once AI’s intrigue hit the scene in November 2022, and megacap tech took charge. Today, you might say we are walking on eggshells when gauging all of the macro determinants, so it’s crucial to stay a step ahead of policymakers and how markets evolve to manage risk.

At Allio, we acknowledge that the Fed and other central banks around the world have undue influence on macro conditions; it’s not something investors should dismiss. Executing portfolio decisions and asset allocation shifts based on politics often results in disaster. Rather, second-order thinking and nimble portfolio management are required strategies. 

Whether periods of monetary tightening and loosening are in play, monitoring macro determinants is crucial. The Macro Dashboard™ is a tool designed to track variables such as growth, inflation, interest rate trends, corporate credit spreads, currency movements, and market conditions. It helps investors identify trends and opportunities using Ray Dalio’s principles. Asset class weights, sector rotation, and industry tilts are just some of the actionable insights The Macro Dashboard™ can yield.

There will be times when risk-on corners of the market should be favored and other periods when safe-haven assets should be overweighted. Diversification across stocks, bonds, real estate, energy, and alternatives may mitigate central banks run amuck. In certain regimes, inflation-protected securities can help preserve purchasing power. Big picture, taking a macro approach in today’s markets that are heavily impacted by central bank policy is critical to success.

Allio’s Dynamic Macro Portfolios are designed to help investors participate in bull markets and offer defense in bear markets. As the global debt cycle evolves and amid rising geopolitical tensions, our team expects black-swan events to unfold with little warning. That would drive macro volatility and demand that investors be more nimble with their allocations. History proves that being dynamic and open to new ideas can work in both up and down markets. 

The Bottom Line

The history of the Fed and the role of central banks today are filled with controversy. This supposedly independent government agency wields significant power over the economy and financial markets. The Fed’s role in the macro economy is undeniable, so investors must always be prepared to adjust their portfolios based on trends in inflation, growth, and other key determinants.

We take that to heart in how we form portfolios for everyday investors. Our tools, which include Allio’s Macro Dashboard, are designed to help investors keep an eye on the same data the Fed watches to manage risk and stay ahead of the curve.