Unprecedented! Justice Department "Puts a Gun to the Fed's Head," Is the US Market's "Darkest Hour" Here?

The US Department of Justice has launched a criminal investigation into Federal Reserve Chairman Jerome Powell, marking an unprecedented escalation in the conflict between the White House and the Fed, which triggered a simultaneous sell-off in US stocks, bonds, and the dollar upon the news breaking. According to reports, the Justice Department has issued a grand jury subpoena to the Federal Reserve concerning the renovation project of its headquarters and initiated a criminal investigation into Chairman Powell. Powell subsequently issued a statement clarifying that the action is not centered on his congressional testimony or the renovation project itself, but stems from the Fed's insistence on setting interest rate policy based on its own independent judgment. The investigation is still in its early stages, and it remains unclear whether it will proceed to formal charges. However, from the market's perspective, the critical issue is not the legal outcome itself, but the fact that central bank independence has, for the first time, been directly dragged into political gamesmanship through the form of a judicial investigation. Such a shift doesn't require an actual "guilty verdict"; merely entering a state of uncertainty is sufficient to impact asset pricing. The market reaction directly confirms this logic, with the US dollar weakening, US stocks and Treasury bonds facing pressure, while gold prices strengthened significantly. This particular combination of asset price movements is not based on a reassessment of economic data (like growth or inflation), but rather a typical market response to an immediate rise in institutional and governance risks. In the short term, risk appetite is contracting, with "foreign exchange / precious metals moving first." At the short-term level, the market reaction is highly concentrated, manifesting as a classic risk-off pattern: a weaker US dollar, pressured equity indices, and rising gold prices. The core driver of this shift does not originate from traditional economic data like inflation or employment, but from the uncertainty shock introduced by the governance risk itself. Strategist Charu Chanana from Saxo Bank points out that such events inject a new source of volatility into markets, with the impact typically appearing first and most pronouncedly in foreign exchange and precious metals markets, before potentially gradually transmitting to interest rate pricing. Analysis from the rates and macro strategy side points to similar conclusions. Macro strategist Prashant Newnaha states that markets are more likely to view this event as "the latest chapter in the narrative of eroded Fed independence," putting short-term pressure on the dollar, potentially capping the upside for interest rates, while benefiting precious metals relatively. However, he also believes the initial market shock is primarily about sentiment and risk appetite adjustments. Overall, in this initial phase, market trading behavior involves more defensive adjustments to reduce risk exposure in an environment of heightened uncertainty, rather than establishing directional positions based on a new macro narrative. In the medium term, a re-evaluation of the "institutional discount on US assets" is underway. If developments surrounding the judicial investigation and political maneuvering persist, the market will inevitably enter a deeper reaction phase: a systematic reassessment of the institutional stability underpinning US assets. This will first impact the dollar's safe-haven foundation. The global status of the US dollar relies not only on economic strength but also on the predictability of its institutional framework. If legal tools become a potential channel for interfering with the central bank, the credibility of the dollar as the "ultimate safe haven" will be eroded. Coupled with potentially rising inflation concerns, this would exert structural pressure on the exchange rate. Concurrently, the pricing logic in interest rate markets will also evolve. Doubts about central bank independence translate directly into higher long-term risk premiums. Investors will demand additional compensation for the uncertainty that future policy could be distorted by non-economic factors. The result could be that even if short-term rates fall due to dovish expectations, long-end rates remain firmer due to this premium, leading to a "stress-induced steepening" of the yield curve. For the stock market, the impact is more subtle and prolonged. The initial reaction is typically increased volatility and a flight to safe-haven assets, rather than an immediate valuation reset. But over time, the overall equity risk premium for the market faces a systematic upward adjustment, particularly for growth assets reliant on distant future cash flows, whose valuations would face more sustained pressure. This stems not from short-term earnings concerns, but from a repricing of the "institutional uncertainty" factor within the cost of capital. In the long term, the key lies not with "Powell personally," but with "successors and institutional boundaries." From a longer-term perspective, the market is shifting its focus from the "investigation" as an isolated event to the evolution of institutional arrangements and personnel pathways triggered by it. The recent view from Jan Hatzius, Chief Economist at Goldman Sachs, is somewhat representative. He believes that while the judicial investigation intensifies market concerns about central bank independence, he expects Powell to maintain a data-dependent decision-making model for the remainder of his term as Chairman (until May 2026). However, market speculation does not stop there. A more complex key variable is being incorporated into the pricing framework: Powell's term as a Fed Governor theoretically extends until January 2028. Therefore, a core悬念 is forming—will he choose to remain as a Governor after his Chair term ends? How would such a move affect the pace of subsequent personnel changes and the balance of power on the Federal Reserve Board? The focus of market博弈 is undergoing a subtle shift. Future key trading variables may partially extend from the traditional "economic data and interest rate path" to an "institutional timetable" intertwined with personnel arrangements and legal processes. The clarity and evolution of this timetable will directly influence the market's long-term pricing of monetary policy independence and continuity. What "hard signals" should investors watch next? Compared to policy statements, the market is focusing on subsequent verifiable developments to assess the true scope and persistence of the impact from this judicial investigation event. Core observation points revolve around three dimensions: First, changes at the procedural level. The market is closely watching whether the investigation escalates from the current "grand jury subpoena and threat of criminal charges" to formal indictments or more coercive legal measures. Currently, data from the Polymarket platform shows the market prices only an 18% probability of Powell being federally indicted by June 30, indicating investors remain cautiously watchful regarding an escalation of legal proceedings. Second, whether structural adjustments occur in cross-asset linkages. Whether the short-term risk-off reaction (dollar down, gold up, yield curve steepening) evolves into more persistent cross-asset pricing relationships will be key to gauging the persistence of the risk. The market needs to observe if the correlations between the dollar, gold, and long-term interest rates undergo fundamental changes. Finally, the personnel path in May. With Powell's term as Chairman ending in May 2026, the market has already anchored "personnel milestones" as key pricing points. Trump has indicated he will announce a successor soon, with Kevin Hassett currently seen as a frontrunner, while Powell's term as a Governor lasts until 2028. The market is trading the clarity of the successor candidate, their policy stance, and the pace of the congressional confirmation process as core macro variables affecting the "duration of central bank independence risk," with their importance now approaching that of inflation and employment data.