- A DOJ probe tied to Fed Chair Jerome Powell’s Senate testimony on the Fed’s $2.5 billion HQ renovation is amplifying fears of political pressure on monetary policy.
- Markets are responding by pushing long-term Treasury yields higher and steepening the 2s/10s curve as investors demand more term premium and price higher inflation risk.
- Bond investors are favoring short maturities while avoiding duration, reflecting uncertainty over whether the Fed might be forced into cuts that later re-ignite inflation.
- Higher long-end yields threaten housing affordability and broader borrowing costs, with key unknowns around the investigation’s outcome and deficit-driven Treasury issuance.
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The recent Department of Justice (DOJ) investigation into Jerome Powell—triggered by his June 2025 Senate testimony regarding Fed spending on a $2.5 billion renovation of its headquarters—marks an escalation in tensions between the White House and the Fed. Powell has called the legal threats a “pretext” aimed at influencing monetary policy to favor lower interest rates, while critics warn that this could undermine the Federal Reserve’s autonomy.
Markets are reacting. The investigation has reinforced fears among investors that the Fed’s rate-setting could be subjected to political pressure, potentially leading to greater inflation expectations. This is evident in rising long-term break-even inflation rates. Concurrently, the yield curve—especially the spread between 2- and 10-year Treasuries—has steepened significantly, recently nearing ~0.65 basis points (i.e. 65 bps), reflecting both expectations for future rate cuts and concerns about term premium expansion.
Fixed income investors now face a difficult decision. Short-dated Treasuries—2-year and 5-year notes—are being bought, offering modest yield but less exposure to duration risk. Long-dated Treasuries are being sold, or at least avoided, due to concerns that any purported Fed dovishness could be reversed if inflation reaccelerates or if the administration pushes the Fed against its natural policy framework.
The steepening curve has real consequences. Mortgage rates—tied closely to the 10-year Treasury—may rise, increasing affordability pressures in housing, which already looms as a political and economic risk. Meanwhile, rising long-term interest rates could also increase borrowing costs across the economy, exacerbating the effects of large fiscal deficits.
Looking forward, strategic implications and uncertainties dominate. First, the outcome, scope, and timing of the DOJ investigation will be watched closely—if credible evidence of political interference emerges, the risk premium on U.S. sovereign debt could increase further. Second, fiscal policy—in particular Treasury issuance to cover deficits—if left unchecked, may reinforce higher term premia. Third, if markets seriously doubt Fed independence, U.S. sovereign bonds and the dollar could suffer, and inflation expectations may get unanchored. Finally, policymakers may be forced into making difficult choices between supporting markets/housing and maintaining macroeconomic/monetary credibilities.
Supporting Notes
- Powell said the DOJ threatened a criminal indictment over his 2025 Senate testimony related to the $2.5 billion Fed headquarters renovation, calling the move a “pretext” to force interest-rate cuts.
- Investors fear any erosion of Fed independence may raise inflation expectations and force yields higher, particularly in the long end of the curve.
- The U.S. 10-year breakeven inflation rate recently rose to about 2.29 %, the highest since early November.
- The yield curve between 2- and 10-year Treasuries briefly steepened to ~67 basis points before narrowing somewhat.
- As of mid-January 2026, the 10-year Treasury yield is about 4.16–4.18 %, while the 2-year yield is approximately 3.54–3.60 %.
- 10-2 spread stands near +0.65 basis points as of January 13-15, 2026, still below its longer-term historical average (~127 bps), implying room for further steepening.
- Bloomberg reports that the 10-year briefly exceeded the 2-year by more than 72 basis points—highest in about nine months—on expectations of eventual Fed policy easing.