Another week, and another new risk factor to digest. This time it’s a sharp escalation in President Donald Trump’s struggle with the Federal Reserve, which critics charge is a thinly veiled effort to force the central bank to lower interest rates.
On Sunday evening, Federal Reserve Chair Jerome Powell said in a statement That the Justice Department is investigating him in a criminal investigation into the $2.5 billion renovation of the central bank’s headquarters in Washington, DC.
Asked about the Powell investigation, Trump told NBC News: “I don’t know anything about it.”
The question, once again: Will the markets react? Or, will recent history repeat itself, in which case the crowd will see through the news and keep the bull market humming?
Meanwhile, Fed Chair Jerome Powell is on a roll. In a couple of minutes Video statement Released on Sunday evening, they came as a new tactic by President Trump in response to President Trump’s refusal to cut interest rates sharply, which has led to calls for the president to
“The risk of criminal charges is the result of the Federal Reserve setting interest rates based on the best assessment of what serves the public, rather than following the president’s priorities,” Powell said in his statement. “It’s about whether the Fed will continue to set interest rates based on evidence and economic conditions — or whether monetary policy will instead be directed by political pressure or intimidation.”
Trade will be closely watched this week and viewed through the lens of the Fed investigation. For some analysts, the news puts a damper on the near-term outlook for risk appetite.
“We expect the dollar, bonds and stocks to all fall on Monday after the sell-off in April of last year, at the height of the tariff shock in April of last year and at the height of the earlier tariff shock and the risk to US assets as the Fed chair.
Black Gone, head of US rates strategy at RBC Capital Markets, said: “If the Fed’s independence comes under further attack, markets will start pricing in higher inflation expectations, the inflation risk premium, and the term premium.”
The key variable is how Treasury yields react, or not. As I noted in this week’s edition of ETF Portfolio Strategist, “Yields are still trading in a relatively low range. When/if that changes, the markets may see a large amount of risk appetite redress, but such an attitude adjustment is not imminent.”
It was written before Powell’s statement was issued. Has the production calculus changed in the last several hours? We are about to find out.
By Friday’s close, it was still trading in a tight range since September. Traders will be watching to see if it breaks higher this week and has been through the roof in recent months.
Also keep an eye on the most inflation-sensitive rates. Will the moderate increase in production since October continue this week?
If the 2025 playbook holds, markets will experience turbulence and then recover. It’s anyone’s guess if the script gets the boot again in this year’s sequel. But to the extent that markets will leave clues about where we’re headed, the directional bias of Treasury yields, or the lack thereof, is on my short list as a key factor in setting (or resetting) the mood on Wall Street.