The conflict between the White House and the Federal Reserve has moved from political pressure to legal warfare.
In a dramatic escalation over the weekend, Fed Chair Jerome Powell revealed the administration has threatened him with a criminal indictment, ostensibly related to the renovation of the Fed’s headquarters. Powell slammed the move as a “pretext” designed to force interest rate cuts.
📉 THE MARKET VERDICT: “Governance Risk” is the New Inflation Investors immediately priced in the threat to institutional stability.
- USD: Sold off broadly. Typically a safe haven, the Greenback is suffering as political risk hits home.
- Gold: Strengthening as the ultimate hedge against central bank politicization.
- Treasuries: A “Bull Steepening” curve. Investors are betting the Fed might be forced to cut rates (bullish for bonds) but long-term inflation expectations are rising (steepening the curve).
🗣️ WHAT THE STREET IS SAYING:
- The “Nuclear” Option: Karl Schamotta (Corpay) warns this is “pouring gasoline everywhere.” By attacking the central bank legally, the administration risks kicking the legs out from under the dollar’s global reserve status and driving borrowing costs higher—the exact opposite of the President’s goal.
- The Governance Premium: Charu Chanana (Saxo Bank) notes that markets now have to price in a “institutional risk premium.” The narrative has shifted from Inflation/Growth to Politics/Oversight.
- The Long Game: Jack Ablin (Cresset Capital) and Alex Morris (F/M Investments) suggest this is tactical theater. With Powell’s term ending in May, this may be a move to force him off the board early or signal to his successor: “Your job is to do what I want.”
💡 THE BOTTOM LINE: The market is currently treating this as a dangerous escalation, but not yet a policy pivot. However, if the DOJ proceeds with an investigation, we could see a permanent decoupling of the US Dollar from its traditional “safe haven” role during crises. As Damien Boey (Wilson Asset Management) notes: “It makes sense to be taking on more commodities exposure.”
👇 Discussion: Is this just political theater ahead of Powell’s term expiry in May, or is the era of an independent Federal Reserve officially over?