[International Financial Briefing] U.S. Department of Justice investigates and pressures Chairman Powell... Financial markets show "selective reactions" amid debates over Federal Reserve independence

The U.S. Department of Justice has launched an investigation into Federal Reserve Chair Jerome Powell, sparking a heated debate over potential damage to the Fed’s independence. However, global financial markets have not fully shifted to safe-haven assets; instead, they show differentiated responses across asset classes. Despite heightened political uncertainty, stock markets rebounded around corporate earnings expectations, the dollar weakened, and interest rates rose, with mixed market signals.

Investigation into Powell, spreading to “Political Suppression” debate

It is reported that Chairman Powell faces possible grand jury subpoenas and criminal charges for allegedly providing false and understated reports regarding the renovation budget of the Federal Reserve building during a Congressional hearing. In response, Powell directly characterized the incident as “obvious political suppression” via video and emphasized the unwavering commitment to the fundamental task of implementing monetary policy.

The White House denied interference in the investigation, but former and current Fed officials, along with leading economists, issued statements expressing strong concerns that the independence of the Federal Reserve system could be compromised. Some experts point out that such pressure is typical of emerging market countries and could negatively impact inflation expectations and financial market stability in the medium to long term.

Markets focus more on performance and indicators rather than “Fed risk”

After the incident was reported, temporary safe-haven signals appeared, such as rising gold and silver prices and falling stock index futures. However, once regular trading hours began, market sentiment quickly shifted. The U.S. S&P 500 rebounded driven by tech stock buying, and the European Stoxx 600 index also closed higher due to strength in semiconductor and pharmaceutical stocks.

In the foreign exchange market, the dollar index fell amid concerns over the Fed’s independence being compromised, while the euro appreciated. The yield on the 10-year U.S. Treasury rose slightly amid perceptions that political pressure could stimulate inflation. This indicates that markets view the Fed risk as a medium- to long-term policy credibility issue rather than an “immediate crisis.”

Rate cut expectations retreat… Fed policy path under pressure

Goldman Sachs analysts believe that the timing of the Fed’s rate cuts may be further delayed from previous expectations. Since the labor market has not slowed sharply as feared, rate cuts are expected to occur once in September and once in December this year. This suggests that under political pressure, the Fed will find it difficult to easily shift toward easing policies.

Bloomberg Economics and PGIM warn that if the Fed’s policy credibility is damaged, it could lead to rising government bond yields and increased overall financial costs, potentially undermining the institutional norms of monetary policy itself.

Geopolitical and trade issues unfold simultaneously… multiple layers of uncertainty

Meanwhile, the global environment remains fraught with complex uncertainties. The U.S. announced immediate 25% tariffs on countries trading with Iran, which responded by cracking down on domestic unrest and condemning external interference. The EU is close to introducing a minimum import price system in negotiations with China over electric vehicle imports, and investor confidence indicators in the Eurozone show signs of improvement.

Additionally, the G7 will discuss stabilizing critical mineral supply chains to counter China’s dominance in rare earths, while Greenland reiterated its strategy of strengthening defense with NATO at its core. These issues have limited direct impact on financial markets but are more about raising long-term geopolitical risk premiums.

“Financialization of Political Risks,” the Fed’s credibility faces test

The controversy surrounding Powell’s investigation serves more as a testing platform to gauge how the future of the Fed’s independence—an institutional reputation—will influence asset prices and interest rate paths, rather than triggering short-term market volatility. While markets have not yet assessed it as a systemic risk, they remain cautious, as blurred boundaries between politics and monetary policy could pose structural pressures on inflation expectations and the dollar’s credibility.

Source - International Financial Center Report