- The DOJ issued grand jury subpoenas tied to Chair Powell’s June 2025 testimony on a $2.5B Fed renovation, raising fears of political pressure on Fed independence.
- Markets priced in higher institutional risk as 10-year Treasury yields rose while 2-year yields dipped, steepening the curve.
- The dollar weakened and gold hit record highs as investors sought hedges against uncertainty in U.S. monetary-policy credibility.
- Former Fed chairs, ex-Treasury secretaries, and strategists warned the probe could lift long-term borrowing costs, delay rate-cut expectations, and raise volatility.
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The unveiling of a DOJ criminal investigation into Chair Jerome Powell marks a critical escalation in U.S. political pressure on the Federal Reserve. The central impetus is Powell’s June 2025 testimony before Congress concerning a $2.5 billion renovation of Fed headquarters, during which he denied certain luxury or cost-inflating features—statements now under scrutiny through bipartisan criticism and legal inquiry. Powell insists the probe is a “pretext” aimed at coercing the Fed into cutting interest rates, especially given rampant criticism from President Trump for not delivering harsher rate cuts.
Market pricing has quickly absorbed this new institutional risk. Long-term Treasury yields rose modestly (e.g., ten-year up ~1-2 basis points to 4.18–4.21%), while short‐term yields actually edged lower. This configuration steepens the yield curve, signaling investor concerns about longer-term inflation and political constraints on future rate policy. Rarely do political crises so directly shift expectations of central bank autonomy, and this one appears to be increasing risk premiums rather than shifting expectations of Fed action in the short term.
The dollar’s decline and gold & silver’s dramatic upticks reflect the market’s search for safe havens amid uncertainty, especially about U.S. monetary policy credibility. Meanwhile, equity markets—particularly financials—have sold off, given fears of interference in interest rate setting and regulatory unpredictability.
Institutional reactions have been unusually strong. Former Fed chairs, Treasure Secretaries, and eminent economists have issued joint statements decrying the probe as a threat to both rule of law and economic stability. Analysts at TD Cowen and Goldman Sachs warn that the threat to Fed independence could result in elevated long‐term rates, higher risk premiums, and less confidence in the U.S. fiscal-monetary framework.
Strategically, rising long-term yields increase borrowing costs for both government and private sectors. Steeper yield curves can pressure financial institutions but may also provoke tighter lending standards. Expectations of rate cuts later in 2026 are likely to be delayed or damped. Market volatility may remain elevated as new information (any charges, court rulings, or statements) emerges. Open questions include how firmly DOJ pursues charges, whether legislative or judicial intervention will occur, and how this tension will interact with incoming economic data, especially inflation metrics.
Supporting Notes
- The DOJ served grand jury subpoenas to the Fed and threatened criminal indictment regarding Powell’s June 2025 Senate testimony about the $2.5 billion Fed renovation project.
- Powell stated the threats are “pretexts” intended to undermine the Fed’s ability to set rates based on economic data rather than presidential preference.
- The yield on the benchmark 10-year Treasury rose to approximately 4.18–4.21%, while the 2-year note fell slightly by ~1-2 basis points, leading to curve steepening.
- The U.S. dollar index fell by around 0.2-0.35%, gold surged to a record ~$4,600 per ounce, and markets saw declines in financial sector equities.
- Former Fed chairs (Greenspan, Bernanke, Yellen) and Treasury Secretaries (Paulson, Rubin, Geithner, Lew) issued a statement warning the investigation is an unprecedented attempt to undercut central bank independence.
- Analysts at Goldman Sachs’ Global Strategy Conference indicated two rate cuts now forecasted in June and September 2026, adjusting previous expectations due to concerns over Fed independence and upcoming economic data.