Despite a U.S. Department of Justice subpoena causing significant early-session market volatility, U.S. stocks ultimately staged a V-shaped recovery overnight, rebounding strongly from intraday lows, indicating investors have limited concern about the Federal Reserve's independence.
Barclays PLC strategist Ajay Rajadhyaksha noted in a recent report that investors should ignore the political noise, arguing that even if the White House were to intervene in monetary policy through extreme measures, the bond market would act as the "ultimate gatekeeper," offsetting the effects of inappropriate rate cuts by pushing up long-term interest rates. The market reaction confirms this assessment. According to Bloomberg data, following the news of the DOJ subpoena, the probability of a March rate cut actually decreased from 25% to 20%, while long-term inflation breakeven rates remained virtually unchanged. Republican Senator Thom Tillis has stated he will block all Fed nominations until the DOJ issue is resolved; the Senate Banking Committee's narrow 13-11 majority suggests a political stalemate might actually protect the Fed's status quo. Barclays PLC points out that the real macroeconomic risk lies not in political headlines but in the sustainability of the AI narrative. Despite being bombarded with negative news like trade wars in 2025, the U.S. economy still achieved growth exceeding 2%, with the Q3 growth rate recently revised upward to 4.3%. The Atlanta Fed's GDPNow model currently shows a tracking estimate of over 5%. Analysis suggests this week's focus should be on upcoming inflation data and bank earnings, rather than being led by political theatrics. Barring seismic events like military action in Greenland or large-scale intervention in Iran, purely political conflicts do not constitute a reason to exit risk assets.
DOJ vs. The Fed: An Ineffective Political Pressure Campaign
U.S. stocks faced selling pressure in early trading overnight, with stocks, bonds, and the dollar falling in unison, while gold and cryptocurrencies jumped. However, as observed by Bloomberg analyst Ye Xie, the stock market subsequently staged a strong rebound from its session lows, reflecting three factors that diminish the practical impact of the political conflict. First, Fed Chair Powell is set to step down in May; attacking an outgoing chair has limited impact on the overall trajectory of monetary policy. Second, although Powell's term as Chair is ending, his term as a Governor extends to 2028. Prediction market data from Kalshi shows the recent developments might actually increase the likelihood of Powell remaining as a Governor to defend Fed independence, with this probability rising from under 20% to around 50%. Third, the DOJ investigation could backfire on Trump during the Fed nomination confirmation process. Republicans hold only a slim 13-11 advantage on the Senate Banking Committee; Senator Thom Tillis has publicly stated he will oppose all Fed nominations until the legal issues are fully resolved. Senator Lisa Murkowski, who voted against Stephen Miran's nomination last year, has also expressed support for Tillis's stance. Wells Fargo strategists note that a greater risk to the Fed stems from oral arguments scheduled for January 21st at the Supreme Court regarding a case against Fed Governor Lisa Cook. A ruling supporting the Trump administration could trigger a movement of up to 20 basis points in long-term breakeven rates and a roughly 2% decline in the U.S. dollar. Barclays PLC, however, believes the actual impact on monetary policy will be nearly zero, and could even be counterproductive. Investors need to understand that this kind of public political pressure will not lead to a near-term softening of interest rate policy. Conversely, to demonstrate its independence, the Fed might even lean marginally more hawkish. Market pricing already reflects this:
The Bond Market is the "Ultimate Gatekeeper"
In its 2026 macro outlook, Barclays PLC presents a key argument: even if the executive branch were to replace all FOMC members with doves, they could not defy economic reality because the bond market is the final arbiter.
Transmission Mechanism Failure: Unlike the UK or the Eurozone, the U.S. real economy is most sensitive to the "belly" of the yield curve. The largest source of borrowing for U.S. households—the 30-year mortgage—has an average duration of 6-8 years; U.S. corporate debt issuance is also concentrated at the 5-7 year point on the curve. Inflation Backlash: If a new committee sets the federal funds rate too low (below levels justified by economic fundamentals), inflation fears would quickly intensify. This would cause long-term rates to spike, thereby increasing the borrowing costs that truly matter for the economy, completely negating the intended effect of the rate cuts.
Furthermore, the effectiveness of a series of measures recently proposed by Trump is also questionable. These include capping credit card rates, banning corporate entities from buying homes, and directing government-sponsored enterprises to purchase $200 billion in mortgage-backed securities. While MBS spreads initially tightened by 10-15 basis points, the main buyers currently overweight in MBS are fund managers and hedge funds. If spreads tighten excessively, these relative value investors would simply reduce their positions. More importantly, if concerns about Fed credibility cause the 10-year Treasury yield to rise by more than 15 basis points, any administrative intervention would be rendered futile.
What Truly Demands Attention is AI and Economic Resilience
Barclays PLC emphasizes that investors should learn the lesson from 2025: focus on data, not noise. Despite headlines about trade wars, nearly zero job growth, and a sluggish housing market, the U.S. economy still achieved growth exceeding 2% in 2025. Even more striking are the data revisions. The Q3 2025 growth rate was recently revised upward to 4.3%, higher than Q2's 3.8%. The Atlanta Fed's GDPNow model indicates a current tracking estimate exceeding 5%. This remarkable economic resilience is largely attributable to the AI narrative. Barclays PLC contends that a sudden collapse in compute and inference demand, such as a sharp drop in AI adoption rates, poses a greater macro risk than political headlines. Looking to this week, market direction will be data-dependent. Barclays PLC believes the potential for a downside surprise in core CPI is currently underestimated by the market. Simultaneously, as major banks report earnings, investors should focus on commentary regarding credit card rate caps and the overall health of the U.S. consumer. Market reactions also confirm institutional investors' steadiness. Long-term inflation breakeven rates are only slightly above Friday's close, and the 5-year, 5-year forward breakeven rate—a gauge of long-term market expectations—did not move at all. Although gold rose 2% and the dollar was sold off, considering gold is in a multi-year bull market, this move is not extreme. If the bond market were truly worried about a permanent blow to Fed independence, the reaction would be far more pronounced.
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