Bitcoin Loses Macro Correlation as Fed Independence Fears Trigger Market Shift

Bitcoin has recently deviated from its traditional macroeconomic correlations, as investors begin to price in a new risk: the potential erosion of U.S. Federal Reserve independence. This shift is driven by mounting concerns over the Trump administration's aggressive political pressure on Fed Chair Jerome Powell and the broader Federal Reserve system. The recent Department of Justice subpoena against the Fed has intensified these concerns, with market participants recalibrating expectations for inflation, interest rates, and Treasury yields according to Morningstar analysis.

The subpoena, tied to prior remarks from Powell about the cost of renovating the Fed's building, has been framed as an attempt to exert influence over the central bank's policy decisions. Powell has explicitly stated that such actions represent an effort to undermine the Fed's independence in monetary policy. The incident marks a significant escalation in the long-running tensions between Trump and Powell, raising questions about the future of central bank autonomy and its impact on long-term economic stability.

The Federal Reserve's credibility as an institution is now under scrutiny. Morningstar's Grant Slade noted that if Trump succeeds in forcing rate cuts for short-term political gains, the Fed's 2% inflation target could lose credibility. This would disrupt long-term inflation expectations, increasing volatility and potentially driving up Treasury yields as investors demand higher compensation for uncertainty according to Morningstar research.

Why Did This Happen?

The Federal Reserve's independence has long been a cornerstone of economic policy in the United States. The current dispute centers on Trump's repeated criticism of Powell for not lowering interest rates and his push for a more dovish monetary stance. While Trump has denied involvement in the subpoenas, the actions taken by the DOJ suggest a strategy to shape monetary policy in a way that aligns with his economic agenda.

This political pressure is not isolated. The Trump administration has also taken aggressive international actions, including military interventions in Venezuela and suggestions of annexing Greenland. These moves reinforce the perception that the president is willing to pursue bold and unconventional strategies to advance his "America first" vision.

How Did Markets React?

Markets responded immediately to the news. The U.S. dollar fell against the euro and the pound, and gold prices rose as investors sought safe-haven assets according to market data. Equity markets also dipped in early trading, with the S&P 500 and Nasdaq 100 both declining slightly. The reaction reflects a broader reassessment of inflation expectations.

Analysts are divided on the significance of the development. Trevor Greetham of Royal London Asset Management noted that while the Treasury market did not react strongly, this is partly because the conflict between the Fed and Trump is not new. A softening labor market already points to potential rate cuts, reducing the immediate impact of the political pressure.

What Are Analysts Watching Next?

The Fed is set to appoint a new chair in May 2026, and the current political climate could shape the appointment. Kevin Hassett, a Trump-aligned economist, is seen as a frontrunner for the role. Analysts suggest that the next chair will likely adopt a more dovish stance, particularly in rate-cutting decisions.

The broader implications for monetary policy are still unclear. While some experts believe the Fed will retain its independence, others warn of long-term risks to inflation control and economic stability. The "time inconsistency problem"—where a politically influenced central bank might prioritize short-term growth over long-term price stability—has been cited as a growing concern.

Market participants are also monitoring the potential for a "hard landing" scenario, where the Fed may be forced to engineer a recession to restore inflation credibility. This outcome could have significant implications for global markets and investor sentiment.

Investor behavior continues to evolve. While major Bitcoin and Ethereum ETFs have seen outflows, altcoin ETFs have shown steadier inflows. This suggests a shift in exposure strategies, with some investors opting for more targeted crypto positions rather than broad market exposure.

The Fed's ability to maintain its credibility will be a key factor in shaping market outcomes in 2026. Whether the central bank can withstand political pressure and continue to operate independently will have far-reaching consequences for inflation, economic growth, and financial stability.