Fed Independence Under Fire as DOJ Probes Powell, Spurring Global Concerns

The U.S. Department of Justice (DOJ) has initiated a criminal probe into Federal Reserve Chair Jerome Powell, raising concerns about the Fed's independence and its ability to make decisions free from political influence. The investigation reportedly centers on Powell's June 2025 testimony regarding the Federal Reserve's headquarters renovation.

The probe has triggered unease among global central banks and investors, who view the Fed's independence as a key factor in maintaining financial stability. Currency swap agreements, which are critical for providing dollar liquidity during crises, are now seen as potentially vulnerable to political interference. European officials have already begun exploring alternative arrangements to reduce their reliance on U.S. dollar liquidity.

Analysts warn that if the Fed becomes politicized, it could undermine the effectiveness of monetary policy and weaken crisis response mechanisms. Swap agreements, which served as a critical lifeline during the 2008 financial crisis and the pandemic, might no longer be available during emergencies if they are tied to geopolitical interests. This could leave the global financial system less prepared for future shocks.

Why Did This Happen?

The DOJ's investigation has been framed as an effort to pressure the Fed into lowering interest rates. President Donald Trump has repeatedly criticized Powell for not cutting rates more aggressively, arguing that it is harming consumer affordability. Powell has called the probe a "pretext" and emphasized that the Fed must set interest rates based on economic data rather than political preferences.

The timing of the investigation, coming ahead of Powell's scheduled exit from the Fed in May 2026, has added to concerns about political interference. If the DOJ proceeds with charges, it could lead to a leadership crisis at the Fed and a shift in monetary policy direction. This could also affect the broader economy by raising inflation expectations and altering market behavior.

How Did Markets React?

Investors have already begun adjusting their portfolios in response to the uncertainty. U.S. bond markets have priced in higher long-term yields, with the 10-year breakeven inflation rate rising to 2.29%—its highest level since November 2025. The yield curve, which had been flattening, has started to steepen as investors demand a higher premium for holding longer-dated Treasuries.

The S&P 500 and other major indices have seen increased volatility, with market participants reassessing the risks of a politicized Fed. Precious metals and safe-haven assets have surged as investors seek alternatives to U.S. assets. The U.S. dollar has weakened against major currencies, reflecting a decline in confidence in the dollar's stability as a global reserve currency.

What Are Analysts Watching Next?

Analysts are closely watching how the DOJ investigation progresses and whether it leads to a change in the Fed's leadership. A prolonged legal battle could leave the Fed's Board of Governors understaffed and unable to respond effectively to economic challenges. This could have broader implications for the U.S. economy, including higher borrowing costs and slower economic growth.

Investors are also monitoring the Fed's upcoming policy meetings to see if the central bank will maintain its current stance or if political pressure will force a shift in direction. The housing market, which is highly sensitive to interest rates, is expected to face further headwinds if rates remain high for longer than anticipated.

The European Central Bank has reaffirmed its commitment to cooperation with the Fed but has not ruled out exploring alternatives to U.S. dollar-based liquidity tools. Any shift in global central bank dynamics could further complicate the U.S. economy's ability to maintain its role as a leading financial power.

As the investigation unfolds, global markets will continue to reassess the implications of a potential erosion of Fed independence. For now, investors are preparing for a period of heightened uncertainty and volatility.