Powell takes a stand

On Sunday we learned that US prosecutors had launched a criminal investigation into Federal Reserve Chair Jerome Powell about his testimony before Congress last summer over a $2.5bn renovation of the Federal Reserve’s headquarters. In response, after years of de-escalation and professionalism, Chair Powell released a strong and straightforward video where he characterized the subpoenas as an escalation of the Trump Administration’s ongoing attacks on current Federal Reserve officials and on the Fed itself.

From our perspective, both the subpoenas and the video, are just additional twists in the ongoing saga between these two groups.

With expectations that the Fed would be on the sidelines following the rate cut in December, we already anticipated chatter in early 2026 to center around the central bank’s independence and changes to the committee’s composition. This includes the potentially imminent announcement of a replacement for Powell when his term as Chair ends in May (and speculation on whether he will choose to remain on the board) but also the Supreme Court hearing for President Trump vs. Fed Governor Lisa Cook later in January.

The criminal investigation into Chair Powell raises uncertainty for investors ahead of January’s FOMC meeting and, in our view, increases the probability that the next rate cut will not take place before Chair Powell’s term ends. We expect much of the FOMC will rally behind him and it seems the market has been inclined to agree with Chair Powell as well.

The immediate broader reaction has been a weaker dollar; US Treasury yields up and steeper; and stock futures lower. Our view is that this suggests a possible resurgence of the “sell America” narrative that emerged in April last year following the Trump Administration’s initial tariff policy announcement; noting too that a steeper curve and higher long-term yields contradict the Trump Administration’s aims of lowering long-term yields.

In the liquidity markets, short term interest rates rose modestly as market participants pushed out easing expectations to the middle part of 2026. The January press conference should be interesting, and the next few months will certainly be significant for Fed independence. Although the market reaction calmed during morning trading, we believe the strength of the early response signals potential future ramifications should the investigation rise to the point of an indictment of Federal Reserve leadership.