Trump's DOJ Probe Into the Fed and Its Implications for Market Stability

The U.S. Department of Justice's (DOJ) criminal investigation into Federal Reserve Chair Jerome Powell, launched in early 2025, has ignited a firestorm of debate over the independence of the central bank and its implications for economic stability. The probe, centered on allegations of false testimony regarding the Fed's costly headquarters renovation project, has been widely perceived as a politically motivated effort to pressure Powell into lowering interest rates. This unprecedented clash between the executive branch and the Fed raises critical questions about how political interference might erode investor confidence and distort long-term borrowing costs-a scenario with far-reaching consequences for markets and the broader economy.

Investor Confidence: A Fragile Equilibrium

The DOJ probe has already triggered a "Sell America" market scenario, as investors recalibrate their risk assessments amid heightened uncertainty. According to a report by , the 10-year Treasury yield surged above 4.2%, and the 30-year yield climbed past 4.8% in January 2026, reflecting concerns about inflation and the Fed's diminished autonomy. The U.S. dollar weakened against major currencies, while safe-haven assets like gold and silver surged-gold rising 2.6% and silver exceeding 7%-as investors sought refuge from perceived instability.

Despite initial resilience, with the S&P 500 and Dow Jones hitting record highs in early January 2026, market volatility followed as fears of politicized monetary policy took hold. The probe has also drawn bipartisan criticism, with former Fed officials and global central bank leaders warning that such interference could undermine the Fed's credibility. As CNBC noted, "Investors are now pricing in the risk" that the Fed's ability to stabilize inflation and employment may be compromised by political agendas.

Long-Term Borrowing Costs: A Looming Inflationary Shadow

Political pressure on the Fed risks destabilizing long-term borrowing costs by unanchoring inflation expectations. Historical precedents, such as the 1970s, demonstrate how political interference in monetary policy can lead to prolonged inflationary cycles, ultimately forcing central banks to adopt aggressive rate hikes to restore credibility. Today, concerns are mounting that the DOJ probe could replicate this dynamic.

Data from the fourth quarter of 2025 shows that Treasury yields have risen in response to fears of inflation persistence. For instance, the 10-year yield's climb above 4.2% signals investor demands for higher compensation to offset inflation risks. If the Fed's independence is perceived as compromised, this could exacerbate inflationary pressures, leading to steeper yield curves and higher borrowing costs for both corporations and consumers.

The implications extend beyond government bonds. Corporate bond markets, already operating in an environment of low credit spreads, could face a sharp repricing if inflation reaccelerates. Mortgage rates, closely tied to Treasury yields, may also rise, threatening affordability for homebuyers and further straining the real estate market.

The Broader Economic Risks

The erosion of central bank credibility could trigger a "hard landing" scenario, where the Fed is forced to engineer a recession to reestablish inflation control. This would contradict the Trump administration's stated goal of lower interest rates, as political interference could inadvertently drive borrowing costs higher. Economists warn that such outcomes would disproportionately harm long-term economic growth, particularly in sectors reliant on stable financing, such as infrastructure and housing.

Moreover, the probe risks deepening fiscal dominance-a situation where government fiscal needs override monetary policy objectives. This dynamic could further complicate the Fed's mandate, leading to higher inflation and financial instability as markets lose trust in the central bank's ability to prioritize price stability.

Conclusion: A Test of Institutional Resilience

The DOJ's investigation into the Fed represents a pivotal moment for U.S. monetary policy. While the stock market has shown initial resilience, the long-term implications for investor confidence and borrowing costs remain deeply uncertain. As Powell and his defenders emphasize, the Fed's independence is not just a policy principle but a cornerstone of economic stability. If political pressures succeed in undermining this independence, the consequences could reverberate through markets for years to come-potentially triggering a new era of inflationary volatility and higher capital costs.

Investors must remain vigilant, factoring in the risks of politicized monetary policy when assessing long-term strategies. The coming months will test whether the Fed can uphold its autonomy-or whether the Trump administration's aggressive tactics will force a painful recalibration of market expectations.