Introduction to the Conflict
The Trump administration has launched a criminal investigation into the Federal Reserve over the renovation of its headquarters, making the final months of Jerome Powell’s tenure more difficult. Powell, the chairman of the Federal Reserve, views this as an attempt to escalate pressure on the Fed, as President Trump remains dissatisfied with monetary policy. This move puts the central bank’s independence at risk.
Market Reactions
Experts believe that the lack of independence at the Fed doesn’t go unnoticed, and markets don’t like it. The global financial ecosystem has entered a phase of systemic volatility and power realignment, with the convergence of an institutional crisis at the heart of the Federal Reserve and escalating tensions in various regions. According to Felipe Mendoza, CEO of IMB Capital Quants, this has fractured the stability narrative that dominated the end of last year.
Jon Butcher, Senior U.S. Economist at Aberdeen, notes that the initial market reaction appears negative, with rising risks that a devaluation could weigh on the U.S. dollar, equities, and bonds. In particular, he warns that the long end of the curve could see an increase in term premiums. This also raises questions about the composition of the Fed’s Board of Governors, as a new chair is expected to be appointed soon.
The Impact on the Fed’s Independence
Powell’s term as a governor runs through 2028, and he had been expected to step down once his term as chair ends in May. However, his recent statement raises questions about whether he will remain on the Board to defend the Fed’s independence despite legal risks. Butcher adds that regardless of whether this legal action has merit, it signals the administration’s willingness to continue pressuring the Fed to adopt a more accommodative monetary policy.
The Question of Independence
Paul Donovan, Chief Economist at UBS Global Wealth Management, believes that if the move is aimed at weakening the Fed’s independence, it could backfire on the administration. He speculates that Powell now has less incentive to resign as a Fed governor, given the publicly defiant stance he has taken against this criminal investigation. Donovan outlines a more extreme scenario, suggesting that if a future interest rate decision is particularly close, explicit attacks on central bank independence could push FOMC members toward a more hawkish stance as a show of autonomy.
The Gold Market Narrative
For Carsten Menke, Head of Next Generation Research at Julius Baer, it’s clear that concerns over the Fed’s independence are being reflected in the commodities market. Gold and silver reacted positively to the news, rising 1.5% and 5% respectively in early Monday trading. Menke concludes that growing interference with the Fed and doubts about its independence are among the main bullish wildcards for precious metals in 2026.
Powell Defends the Fed
In a rare statement from a central bank chair, Powell said the move represents an unprecedented action that should be understood in the broader context of the administration’s threats and continued pressure. He stated that the threat of criminal charges stems from the Federal Reserve setting interest rates based on its best judgment of what serves the public interest, rather than following the President’s preferences.
The Real Issue
The real issue is whether the Fed will continue to set interest rates based on evidence and economic conditions, or whether monetary policy will be dictated by political pressure or intimidation. Powell added that throughout his service under four different administrations, he has performed his duties without fear or political favoritism, focusing solely on the Fed’s dual mandate of price stability and maximum employment.
Conclusion
In conclusion, the Trump administration’s investigation into the Federal Reserve has significant implications for the central bank’s independence and the overall economy. The market reactions and expert opinions suggest that the lack of independence at the Fed is a major concern, and the situation will continue to unfold in the coming months. As Powell stated, public service sometimes requires standing firm in the face of threats, and he will continue to do the job the Senate confirmed him to do, with integrity and a commitment to serve the American people. The future of the Fed’s independence and the U.S. economy hangs in the balance, and it remains to be seen how this situation will play out.
