S&P 500 Index Widen Losses to 1%, Nasdaq Drops 1.56%

U.S. stocks retreated sharply on Wednesday, with the S&P 500 index falling 1% and the Nasdaq losing 1.56% as concerns over Federal Reserve independence and regulatory changes weighed on investor sentiment. The selloff followed renewed political pressure on the central bank and uncertainty about the trajectory of monetary policy in 2026.

The Trump administration's push for deregulation has gained renewed focus as Fed Governor Stephen Miran argued that these efforts will reduce inflation and justify rate cuts. In prepared remarks for an economic forum, Miran said that deregulation could eliminate up to 30% of existing business rules and lower inflation by as much as half a percentage point annually.

Investors remain cautious ahead of the Fed's upcoming meeting, where policy rates are expected to stay unchanged. While some Fed officials have acknowledged potential productivity improvements, they suggested it is premature to adjust monetary policy based on uncertain supply-side developments.

Citi analysts expressed confidence in the Federal Reserve's independence despite political pressure. A Citi strategist noted that the bond market had not reacted with alarm to recent developments, with no significant repricing in front-end rate expectations.

Why Did This Happen?

The selloff came as concerns over Fed independence deepened after a criminal investigation into Chair Jerome Powell was announced by the Department of Justice. Powell has denounced the probe as an attempt to influence monetary policy, calling it a "pretext" to push for more aggressive rate cuts.

Investors are also weighing the broader implications of Trump's deregulation agenda. Miran emphasized that the Fed must adjust policy to reflect improvements in supply and productivity, or face deflationary risks and economic contraction.

How Did Markets React?

The S&P 500 and Nasdaq retreated from recent highs as investors reassessed risk exposure. The drop in the Nasdaq reflects continued caution among tech investors, who are sensitive to shifts in rate expectations.

The dollar also faced pressure, with some analysts suggesting that concerns over U.S. asset allocation could lead to a renewed "Sell USA" trade. Non-U.S. equity markets have outperformed U.S. stocks in recent months, with investors shifting toward more diverse portfolios.

Precious metals, including gold and silver, rose sharply as investors sought protection amid heightened geopolitical and economic uncertainty. The move reinforced the narrative that markets are preparing for a prolonged period of central bank caution.

What Are Analysts Watching Next?

Analysts are closely monitoring the upcoming Consumer Price Index (CPI) report due on Tuesday, as well as producer price data. The data will provide fresh insights into inflation trends and could influence expectations for Fed policy in the coming months.

Investors are also watching for signs of how the Trump administration's mortgage-bond purchases might affect interest rates and real estate markets. The program aims to lower housing costs by reducing mortgage rates, which could benefit rate-sensitive sectors like real estate investment trusts.

Despite political turbulence, some strategists argue that the Fed's institutional independence remains intact. Citi senior economist Robert Sockin highlighted that the Fed has not shown signs of politicization, with no mass resignations or policy shifts indicating political interference.

The Fed's next meeting is set for January 27–28, where policymakers will likely decide to keep rates unchanged. However, the central bank will continue to monitor economic developments, including inflation data and market sentiment, for any signs of a policy shift.