Key Takeaways
- Fears that the US Federal Reserve will lose its independence are growing after the US Department of Justice subpoenaed the central bank on Friday.
- Powell has issued a statement saying monetary policy must be set without political “intimidation”; Trump has denied all knowledge of the subpoenas.
- Markets are reacting negatively to the news in trading on Monday, with the US dollar, normally a haven in times of uncertainty, falling against both the pound and the euro, and gold and silver prices rising.
Doubt about the future independence of the world’s most important central bank has soared since Sunday, when the Federal Reserve’s chairman announced that the US Department of Justice had issued subpoenas against the Fed, and threatened a criminal investigation.
The threat, which centers on statements Powell had made before Congress when questioned about runaway costs to renovate the Fed’s building, marks a major escalation in the long-simmering conflict between the chairman and US President Donald Trump.
For Powell, the latest move signifies an attempt to force monetary policy that is in the president’s interest. For market participants, it harbors inflation risk.
How Trump’s Pressure on Powell Could Affect Fed Credibility
“Under a worst-case scenario, where Trump succeeds in his quest to force the Federal Reserve to lower interest rates, the Federal Reserve’s 2% inflation target may lose credibility,” says Morningstar international economist Grant Slade.
“This would, in turn, de-anchor long-term inflation expectations from the central bank’s inflation target and make it significantly more difficult for the Fed to control price growth in the US economy,” according to Slade. “This could result in greater volatility in US inflation going forward and could place upward pressure on long-term Treasury yields as investors seek greater compensation for a more uncertain long-term inflation outlook.”
Investors flocked to gold, and the dollar fell against both the euro and the pound in Monday trading, as investors reassessed expectations over key economic metrics, including inflation and Treasury yields. In the United States, markets slid in early trading, with the S&P 500 benchmark and Morningstar US Market Index both down 0.1%. The technology-heavy Nasdaq 100 fell 0.11%.
In a brief interview with the media on Sunday evening, President Trump appeared to deny all knowledge of the DoJ’s subpoena plans, which threaten Powell with criminal prosecution.
The incident is the latest in a prolonged series of political interventions from the Trump administration on the US Fed and Powell, in which Trump has repeatedly criticized the Fed’s chair for not effecting lower interest rates.
Last year, Trump declared Powell was “a major loser” and called for his termination, but later said he had “no intention” of sacking the veteran economist. In August, he then targeted one of the central bank’s governors, Lisa Cook, citing a supposedly-fraudulent mortgage application as grounds for her dismissal. Cook remains in place amid legal action on both sides.
In a video Sunday evening, Powell framed the incident in terms of the future of central bank independence.
“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure and intimidation,” he said.
Is the Federal Reserve on Course to Lose its Independence?
Fund managers aren’t jumping to the conclusion that President Trump will end US central bank independence.
“The Treasury market hasn’t moved very much, partly because this isn’t the first shot across the bows,” says Trevor Greetham, head of multi-asset at Royal London Asset Management.
“Also, a soft labor market points to further Fed rate cuts anyway, with a 50 basis-point cut priced in,” according to Greetham.
The events of late last week follow a series of international interventions by the Trump administration in the opening days of 2026, with military operations unseating the president of Venezuela and the additional suggestion that the US government would annex Greenland causing international political unease.
Each action appears to lend weight to the belief that the US president is willing to escalate complex situations in pursuit of an “America first” agenda.
The subpoena also comes as the US Federal Reserve looks for its next leader when Powell’s tenure expires in May this year. Economist Kevin Hassett, who is broadly aligned with Trump politically, is seen as the front-runner for the role.
“To win Trump’s nomination, Powell’s successor will have pledged to the president that he will ease monetary policy meaningfully,” says Mark Allan, senior economist at BNP Paribas Asset Management.
“However, the chair is only one member of the broader FOMC. He won’t be able to walk into his first Fed meeting and order the rest of the committee to cut rates. But he will always take the dovish side of any policy argument. Whenever the Fed is faced with a tricky choice between cutting rates, or not, investors can expect the next Fed chair is likely to push for cheaper money.”
Much also depends on whether Powell stays at the Fed past his exit as chairman, because his mandate as a governor on the rate-setting Federal Open Market Committee is only set to expire in 2028.
“It’s not easy to tell if the Fed will change under a new chair. It will also depend on whether Powell stays on the committee and whether the mortgage case gives Trump another scalp,” Royal London’s Greetham says.
Others see this recent monetary policy escalation as part of a longer-term political plan to bolster the president’s approval ratings.
“Taken together, these measures represent a calculated attempt to engineer a more favorable economic backdrop by mid-2026, bolstering approval ratings and mitigating the risk of electoral losses that could leave the president politically weakened for the remainder of his term,” says Patrick Farrell, chief investment officer at Charles Stanley.
What Would an End to Fed Independence Mean for Inflation?
In the longer-term, uncertainty over Fed independence gives economists serious cause for concern around inflation projections and headline economic metrics.
“The increasing pressure Trump is mounting upon the Federal Reserve offers a prime example of what economists refer to as the ‘time-inconsistency problem,’” says Morningstar’s Slade.
“Monetary policy influences economic activity—and thus price growth—with long and variable lags. This, in turn, leads to the risk that a central bank under political influence could choose to prioritize short-term economic growth at the expense of longer-term price stability,” according to Slade.
“By contrast, independent central bankers are more likely than politicians to use monetary policy to tame inflation at the expense of short-run economic activity and employment levels, supporting the argument for central bank independence,” Slade adds.
That leaves the question of US economic growth, and recession risk, in the spotlight.
“The US central bank may be placed in the unenviable position of needing to engineer a ‘hard-landing’ (a US recession) to combat inflationary pressures in an attempt to restore the credibility of its 2% inflation target—something it wouldn’t necessarily need to do had its independence from the executive branch of government not been pierced.”
