For nearly two years, markets repeated the same comforting narrative: inflation was temporary, growth was slowing, and the Federal Reserve would eventually be forced to cut rates aggressively. Reality is now moving in the opposite direction. The latest US employment figures delivered a clear and uncomfortable message to financial markets. The American economy is not collapsing. The labour market is not broken. And inflationary pressures may therefore remain structurally stronger for far longer than investors previously assumed. US payrolls increased by 172,000 in May, significantly above expectations, while unemployment remained stable at 4.3%. More importantly, hiring momentum has now accelerated for three consecutive months, producing the strongest three-month employment expansion in more than two years. This changes the entire macroeconomic equation. Because as long as employment remains resilient, the Federal Reserve has very little room to justify monetary easing, especially at a time when inflation is once again accelerating due to energy prices, logistics disruptions and the broader consequences of the Iran war.

The market immediately understood the implications. Treasury yields surged. Rate futures rapidly repriced the probability of a Fed hike before year-end. Equity markets weakened. Investors suddenly realised that the scenario of rapid rate cuts may have been built on a false assumption: that the US economy was weakening faster than inflation. Instead, America now faces something far more dangerous. Sticky inflation combined with resilient employment. This is precisely the type of environment central banks fear most. The irony is brutal. For months, investors hoped weaker growth would naturally solve the inflation problem. But the US economy continues generating jobs in sectors directly linked to domestic demand and services inflation. Leisure, hospitality, healthcare, construction and manufacturing all continued hiring aggressively in May.

Even more remarkably, parts of the industrial sector are beginning to strengthen again. Defence production, data-centre expansion and inventory rebuilding linked to geopolitical uncertainty are all contributing to renewed manufacturing activity. Non-residential construction linked to AI infrastructure and data centres continues to accelerate rapidly. In other words, the economy is not entering a recession. It is entering fragmentation. Some sectors linked to technology, AI, and strategic industrial investment continue to expand aggressively, while other parts of the economy, particularly lower-income consumers, are already beginning to weaken under the pressure of inflation. And this creates a major political problem for the Federal Reserve. Because the labour market remains sufficiently strong to justify tighter monetary policy, while real wages are simultaneously deteriorating as inflation begins exceeding wage growth again. The social consequences of such an environment are extremely dangerous. Households continue working, but purchasing power weakens. Employment remains strong, but confidence deteriorates. Consumption becomes increasingly unequal. The upper part of the economy benefits from asset inflation, AI investment and industrial subsidies, while the middle class faces rising fuel, food and transport costs.

This is no longer classic inflation. It is geopolitical inflation. And unlike traditional demand-driven inflation, geopolitical inflation is extremely difficult for central banks to control. The Federal Reserve cannot reopen Hormuz. It cannot reduce shipping costs. It cannot lower oil prices structurally if supply disruptions persist. It can only attempt to slow domestic demand enough to prevent inflation expectations from becoming unanchored. That is a very dangerous strategy politically. Because every additional rate increase now increases pressure simultaneously on the Treasury market, the banking system and highly indebted parts of the economy. And this is where the situation becomes potentially systemic for the dollar itself.

For now, the dollar still benefits from higher US yields and global uncertainty. But structurally, the environment is becoming increasingly fragile. Higher interest rates mean rising refinancing costs for the US government itself, at a time when fiscal deficits remain historically elevated, and Treasury issuance continues to explode. The United States, therefore, faces a paradoxical trap. The stronger inflation becomes, the more the Fed may be forced to keep rates high. But the longer rates remain elevated, the greater the pressure on the Treasury market and the financial system. This is precisely the type of mechanism that destroyed Silicon Valley Bank in 2023. Banks and financial institutions holding large portfolios of long-duration Treasuries can rapidly face massive unrealised losses when yields rise sharply. If liquidity pressures emerge and those assets must be sold before maturity, unrealised losses suddenly become real losses. In a stressed environment, this can trigger a broader loss of confidence, forced deleveraging and potentially a larger sell-off in both Treasuries and the dollar itself.

The danger is therefore no longer limited to inflation alone. The danger lies in the interaction among inflation, debt, rates, and financial stability. And markets are beginning to realise that the era of easy monetary solutions may now be over. For years, central banks operated in a world dominated by deflationary forces: cheap energy, cheap labour, globalisation and stable supply chains. That world is disappearing. The new world is more fragmented, more political, more inflationary and far less financially stable. And the latest US employment report may ultimately be remembered as the moment markets finally understood that reality.