Legal investigation of Fed Chair Powell presents new risk to markets

The independence of the central bank is critical. That shouldn’t be a bold or controversial statement. It’s a foundational principle of modern macroeconomic management and a cornerstone of financial market confidence. This is precisely why recent developments involving the US Federal Reserve (Fed) and the Department of Justice are so concerning.

Recent news indicates that the Trump administration’s Department of Justice is opening an investigation into the Fed and has raised the possibility of a criminal indictment connected to Chair Jerome Powell’s testimony regarding cost overruns associated with the Fed’s building renovation.¹ Powell has pushed back publicly, releasing a video in which he argues that the building costs are merely a pretext. According to Powell, the true issue is that under his leadership, the Federal Open Market Committee (FOMC) didn’t lower interest rates as rapidly as the administration had wanted.² This escalation moves beyond political pressure or rhetoric and into the realm of legal intimidation.

Material challenge for risk assets

Over recent months, we’ve watched with concern as the administration’s public pressure on the Fed intensified, but like the market, we had grown accustomed to the jawboning from the administration. Risk assets held up,³ and more importantly, inflation expectations embedded in the bond market remained well anchored.⁴ That point is critical. Had markets believed that Fed independence was genuinely under threat, we would have expected to see a rise in inflation breakevens as investors priced in politically driven monetary policy. That didn’t occur.

This episode is different. The potential use of the justice system against a sitting Fed Chair, particularly in a context that appears linked to policy disagreements, represents a line that markets haven’t previously had to price. As a result, we believe this development introduces a new and material challenge for risk assets, at least in the near term, until greater clarity emerges around how this situation will ultimately play out.

Polymarket, an online prediction market where users bet on the outcome of real-world events, points to a near 70% expectation that Powell is off the FOMC before his term ends in May. But if Powell survives the investigation, it could raise the probability that he leaves his position as chairman but stays on the board after May. In doing so, he would follow only two previous chairmen (George W. Hamlin and Marriner S. Eccles) who remained on the board after their chairman position ended. His comments clearly show he wants to protect the independence of the Fed. 

Implications for markets

The most immediate implication is likely upward pressure on interest rates, driven by higher inflation expectations. Higher rates, in turn, are likely to weigh on US stock valuations, particularly for sectors and styles that are most sensitive to changes in discount rates. The US dollar is also likely to come under pressure. Confidence in the institutional framework of US economic policy has long been a pillar of dollar strength. Erosion of that confidence would likely be supportive of alternatives such as gold and other perceived safe-haven assets. Gold, silver, and possibly bitcoin may also benefit, as some investors increasingly view it as a hedge against institutional instability and political interference in monetary policy.

These actions harden our core view that US assets will lag those of emerging markets, Europe, and Japan. With US valuations more extended than the rest of the world, they’re the most vulnerable to higher rates, a weaker US dollar, and general policy uncertainty.

We stress, however, that the appropriate response is caution, not panic. We would favor hedging portfolio risks where appropriate and closely monitoring the news. At the same time, we believe it would be a mistake to overreact. The administration could still back away from its current approach, particularly if market reactions become disruptive or politically costly. Markets have historically served as an effective constraint. Like the reaction following Liberation Day last April, a significant adverse response could compel the administration to adopt a different approach.