Investors indicate that a U.S. Department of Justice investigation into the Federal Reserve, coupled with a forceful rebuttal from Fed Chair Jerome Powell, has dramatically escalated a long-simmering dispute, publicly placing the independence of the world's most influential central bank in jeopardy.
On Sunday, Powell issued a strongly-worded statement revealing that the Justice Department is investigating him regarding a building renovation project, an inquiry that could even threaten criminal prosecution. He explicitly stated that this action is a "pretext" to pressure the Fed into accelerating the pace of interest rate cuts, thereby seeking political influence.
U.S. President Donald Trump told NBC that he had no knowledge of the Justice Department's related actions, but he once again launched an attack on Powell. Such criticisms have become increasingly frequent and sharp recently, as the Fed's pace of interest rate cuts has not met his expectations.
This investigation and Powell's forceful response have sharply escalated the conflict. Market observers fear this move could undermine the Federal Reserve's independence—a cornerstone of U.S. economic policy and a core pillar of its financial system.
Jens Südekum, chief advisor to German Finance Minister Lars Klingbeil, told Reuters: "Trump is directly attacking the Fed; this is once again eroding confidence in the independence of this American central bank."
"In the end, the United States itself will suffer the most severe losses."
Trump's pressure on the Fed may trigger "unintended consequences."
The escalating dispute also highlights how the Trump administration's attempts to reshape multiple institutions, from the military to the judicial system, are now having a substantive impact on this pillar of American financial strength.
On January 12, the U.S. dollar recorded its largest single-day drop in three weeks against a basket of major currencies; gold prices surged to a record high; U.S. stock index futures fell, while long-term U.S. Treasury yields rose significantly.
Damien Boey, a portfolio manager at Sydney-based Wilson Asset Management, stated: "Chairman Powell has changed his previous strategy for dealing with Trump's threats, this time choosing to confront the core issue head-on—that the Fed has not adjusted interest rates according to the president's wishes."
He pointed out: "Strong gold prices, volatile stock markets, and a slightly steeper yield curve—these movements are largely consistent with the typical market reaction pattern when central bank independence is challenged."
In modern economic theory, the ability of a central bank to set monetary policy independently, free from political interference (at least regarding interest rate adjustments), is considered a core principle. This principle allows monetary policymakers to avoid short-term political pressures and focus on achieving long-term economic stability goals.
For investors, trust in U.S. institutions is a crucial component of the country's "exorbitant privilege" in financial markets—thanks to its status as the issuer of the global reserve currency, the U.S. can attract billions of dollars in capital inflows.
Karl Schamotta, Chief Market Strategist at State Street Global Markets in Canada, noted that pressuring the Fed could lead to "unintended consequences."
He stated: "The government's attempt to influence Fed decisions by launching severe legal threats against central bank officials could push up inflation expectations, weaken the dollar's safe-haven function, and lead to a sharp rise in long-term bond yields, thereby increasing borrowing costs across the entire U.S. economy."
"Pouring gasoline everywhere and then playing with fire usually doesn't end well."
"The technocrat-led Fed is fading into the distance."
In a sense, Powell's forceful counterattack might be a "final battle"—his term as Fed Chair ends in May this year, and Trump has already pledged that his nominated successor will be someone who "firmly believes significant rate cuts are necessary."
Nevertheless, Powell's stance sets a tone for his successor and will also serve as a benchmark for measuring shifts in the Fed's policy direction.
Richard Yetsenga, Chief Economist at ANZ Group, stated that for the entire U.S. financial market, the operational methods of the Fed's three key policy tools—interest rates, the balance sheet, and banking regulation—could all face changes.
He said: "It's too early to draw conclusions, but the trend is clear... The technocrat-led Federal Reserve that we have known for the past few decades is gradually fading from view."
Meanwhile, some investors were already beginning to reconsider whether their portfolios are over-allocated to U.S. assets, and this new type of risk stemming from the Trump administration serves as a further warning.
Christopher Hodge, Chief U.S. Economist at Natixis, stated: "The market has already endured a lot of noise surrounding the Fed and its independence; I think it might weather this storm too, but in the long run, there will eventually be a breaking point."
Admittedly, the market volatility on January 12 was relatively moderate. Some believe this event has had no significant impact on interest rate policy and may even indicate that Trump cannot actually influence Fed decisions.
Speaking at the bank's annual strategy meeting in London that day, Jan Hatzius, Chief Economist at Goldman Sachs Group, said that while the threat of criminal prosecution would intensify doubts about central bank independence, he expects the Fed to continue making policy based on economic data.
He emphasized: "I firmly believe that Powell will make decisions based on economic data for the remainder of his term, unaffected by any external factors—whether the data trend supports faster rate cuts or a pause, he will adhere to this principle."
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