Once again, euphoria returns to the frothy markets. Is this for real?

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

On Wednesday of last week, the U.S. stock market set an all-time record high, then began a week-long fall. On Friday, though, Federal Reserve Board chairman Jerome Powell rode to the rescue, delivering a speech on monetary policy that hinted interest-rates cuts were coming. Markets shot back up to record highs and bond yields plunged. But was the newfound euphoria among investors warranted?

Signs of growing nervousness among investors had begun to emerge over the past couple of weeks. Worries that AI was turning into a bubble were given support this week when a report from an MIT research lab revealed 95 per cent of businesses were yet to generate any return from their AI investments. Comments by OpenAI’s Sam Altman that stocks were indeed in a bubble added to the fears, which were further bolstered by a Wall Street Journal report that Meta had frozen all its AI hiring.

Such market jitters come at a tricky time for central banks. Investors have come to expect that in the event of a sharp sell-off, they will be rescued with cheap money – mainly because Western central banks have been doing that for decades. For his part, Mr. Powell is coming under intense pressure from the Trump administration to cut rates sharply.

At first glance, several central banks can join the Fed in making a case for rate cuts. Recent economic reports suggest the U.S. economy is slowing quickly, while growth in the Canadian, British and European economies remains tepid at best. We’ll get a better read on Canada’s performance with the latest GDP report this coming Friday, but there are growing signs that the first-quarter growth may have run out of steam. Almost everywhere, therefore, the economy is slowing to the point where a recession is a risk. In line with this, Mr. Powell stressed that he is now more concerned about that than about rising inflation.

‘An extraordinarily dovish message’: What market pros are saying about Powell’s speech

And yet inflation remains a persistent problem. Even in Canada, where the rate of price increases has fallen below the Bank of Canada’s 2-per-cent annual target, core inflation recently ticked upward. Pressure on this rate from the international context looks set only to rise too. British inflation is now rising, and at 3.8 per cent is nearly double the Bank of England’s target. In Europe, too, the inflation rate is also holding above 2 per cent.

But most concerning of all is what’s happening south of the border in the world’s biggest economy. U.S. inflation has clearly bottomed now. With most economists predicting the full weight of tariffs will start to be felt in the coming months, the direction of travel for inflation is most likely upward from here.

So central bankers may end up facing an unpleasant dilemma. Economies are slowing but inflation is accelerating, and they must decide which to prioritize. They also must worry about public perceptions: Although central banks, including Canada’s, have cut interest rates over the past year, bond yields have continued rising.

That suggests investors are hedging their bets, preparing for the possibility that central banks might lose control over inflation. In anticipation of this eventuality, they’re demanding higher interest rates on longer-term loans to governments – and to anyone else whose credit costs are determined by bond yields, such as those with mortgages.

They’re also buying gold, which hints at a belief central banks are debasing currencies. Significantly, the value of the U.S. dollar plunged after Mr. Powell’s speech. There is thus a very real risk that in cutting rates, central banks could trigger a turn away from government debt by investors.

Mr. Powell said he thinks the inflation stemming from tariffs will be a one-off, even if it plays out over several months. But he also said he and his colleagues at the Fed will keep a close eye on the data, as any evidence of persistent inflation will keep the bank from cutting rates much.

All told, it’s still risky to assume central banks will ride to the rescue of asset markets as they have in the past. The minutes of the recent Fed meeting revealed that despite the weakening of the U.S. job market, on balance Fed governors are still more worried about inflation than unemployment. If next week’s U.S. Personal Consumption Expenditure report reveals further price pressure, the case for the Fed standing pat will solidify. And if the U.S. jobs report the following week reveals any kind of surprise upside, many governors will hesitate to vote for a cut.

So, despite markets setting new peaks, we may be near the end of this bull market. If we do head into a period of stagflation – where prices continue to rise as the economy slows – investors hoping for a cheap-money bailout may find their calls unanswered. In other words, there’s a good chance the fall could prove turbulent for the stock market.