Introduction to the Crisis
The current US administration’s lack of support for policy and public announcements has led to a situation where investors no longer trust or react to their statements. Instead, they wait for more reliable indicators of reality. The uncoordinated and haphazard model of announcements, which can range from social media posts by the president to official publications and press conferences, makes it difficult to distinguish between reality and fantasy.
The Federal Reserve Under Fire
Jerome Powell, the chair of the Federal Reserve, recently announced that the Department of Justice had served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to his testimony before the Senate Banking Committee. This news drew condemnation from some quarters within the US administration and support for Powell from others. In a show of solidarity, 14 central bank heads released a statement expressing their full support for the Federal Reserve System and its chair, Jerome H. Powell.
Market Reaction
Despite the unprecedented nature of these events, markets did not respond significantly. The US Treasury’s par yield curve for government bonds showed no unusual activity, and US stocks and bonds rebounded from early losses. The S&P 500 even rose to a fresh all-time high, and the yield on the 10-year US Treasury held below 4.2%. This lack of reaction may seem surprising, given that the investigation into Powell’s testimony is believed to be driven by the desire of the current US president to drive down interest rates more quickly than the central bank is currently doing.
The Reason Behind the Investigation
The current US president has threatened to fire Powell, calling him "incompetent," and has denied any involvement in the investigation. However, Powell believes that the dispute over rate cuts is the clear reason behind the case. As a Federal Reserve chair can only be fired for "cause," an investigation of this type could be used as grounds for Powell’s removal. Powell has stated that the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on evidence and economic conditions, rather than following the preferences of the president.
Disbelief and Doubt
If the prosecution is indeed driven by a need to speed up rate cuts, it would seem doomed on several fronts. Some economists believe that rate cuts will actually be pushed out this year, more slowly than previously expected. Morgan Stanley’s chief fixed income strategist, Vishwanath Tirupattur, has explained that the improved economic momentum and the decline in the unemployment rate mean that there is less need for near-term cuts to stabilize the labor market. Instead, the Fed will likely cut rates as it becomes clear that tariff pass-through is complete and inflation is decelerating toward the 2% target.
The Future of Monetary Policy
UBS notes that markets do not believe the investigation will "materially alter the likely path for Fed easing this year," despite potentially creating uncertainty around the timing of any changes in leadership at the central bank. The health of the US economy will continue to shape monetary policy, with inflation data being a key focus. The Senate plays a crucial role in personnel outcomes, and multiple Republican lawmakers have voiced their concerns over the probe.
A History of Failure
There is also a history of failure to support grand jury investigations by the current administration, such as the cases against New York attorney general Letitia James and former FBI head James Comey, which were dismissed in November 2025. This history of failure raises doubts about the likelihood of success in the current investigation.
Conclusion
In conclusion, the investigation into Jerome Powell’s testimony has significant implications for the future of monetary policy and the independence of the Federal Reserve. While markets have not reacted significantly to the news, the lack of trust in the current administration’s announcements and the history of failure to support grand jury investigations suggest that the prosecution may be doomed. Ultimately, the health of the US economy and the independence of the Federal Reserve will be the key factors shaping monetary policy, rather than political pressure or intimidation.
