Stocks Wobble, Dollar Tips as Trump-Fed Feud Deepens

Tensions between the Trump administration and the Federal Reserve escalated sharply on Sunday, with Fed Chair Jerome Powell revealing he had been served with subpoenas by the Department of Justice over his testimony on the Fed's headquarters renovation. Powell called the threat of criminal charges a 'pretext' to pressure the central bank on interest rates. The move has sent ripples through global markets, with the U.S. dollar weakening and gold prices rising to record levels.

The dollar index fell 0.3% to 98.899 by Monday morning, marking a reversal of its previous five-day winning streak. Meanwhile, futures for the S&P 500 dipped 0.3%, reflecting investor caution amid the uncertainty. The U.S. Treasury rallied as investors sought safe-haven assets.

Powell emphasized that the Fed must continue setting rates based on economic evidence, not political pressure. 'The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,' he said in a statement according to Reuters.

Why Did This Happen?

The confrontation stems from Trump's long-standing criticisms of the Fed's monetary policy. The president has frequently called for rate cuts and has attempted to remove certain Fed officials, a move that has faced legal challenges. Trump denied direct involvement in the Justice Department's actions, telling NBC News he was unaware of them.

Senator Thom Tillis, a Republican member of the Senate Banking Committee, reacted swiftly to the news. He warned that the Department of Justice's independence and credibility were now in question and said he would oppose Trump's upcoming Fed nominations until the legal matter was resolved.

The Fed chair's term as chair ends in May, but his full term as a governor lasts until 2028. Analysts are speculating that Powell might choose to remain in his role to prevent Trump from appointing a more sympathetic successor.

How Did Markets React?

The U.S. dollar weakened broadly against major currencies, including the euro and the British pound according to Investing.com. Gold, traditionally a safe-haven asset, surged to an all-time high of $4,563.61 per ounce amid the heightened uncertainty. Analysts said the Fed's independence had become a key risk for markets, with governance concerns outweighing traditional rate-related factors.

Stocks also moved lower in the wake of the announcement. The S&P 500 futures fell 0.3% by Monday morning, while the Nasdaq 100 was also in negative territory as reported by Bloomberg.

The market's reaction reflects a broader unease about the political environment and its potential impact on U.S. monetary policy. 'This injects a new source of volatility: not inflation data, but governance risk—and governance risk tends to show up first in FX and gold, then in rate volatility,' said Charu Chanana, Chief Investment Strategist at Saxo Bank.

What Are Analysts Watching Next?

Investors are now watching closely for any further legal developments involving Powell. A criminal indictment would be an unprecedented move and could have major implications for the Fed's independence. Analysts also expect the Fed's upcoming meetings to remain under intense scrutiny, as Trump continues to advocate for lower interest rates.

'If the Fed continues to act independently, it is likely to face more political pressure from the administration,' said Vishnu Varathan, Head of Macro Research at Mizuho.

The coming weeks will also bring key economic data, including the January inflation report and the nonfarm payrolls data. These numbers will help shape the Fed's rate decision-making process and could influence the outcome of the Trump-Fed conflict.

For now, the market is navigating a period of uncertainty. The Fed's ability to remain independent from political influence is being tested, and the impact on markets could be significant, depending on how the situation evolves.