Key takeaways

  • Fears that the Fed will lose its independence are growing after the US Department of Justice subpoenaed the central bank.
  • Fed Chair Powell has issued a statement saying monetary policy must be set without political “intimidation.” President Trump has denied all knowledge of the subpoenas.
  • A less independent Fed could lead to bond market volatility and worsening inflation over the long term.

Doubt about the independence of the world’s most important central bank has soared since Sunday, when Federal Reserve Chair Jerome Powell announced that the US Department of Justice had issued subpoenas against the Fed and threatened a criminal investigation.

The threat, which centers on statements Powell had made before Congress when questioned about costs to renovate the Fed’s building, marks a major escalation in the long-simmering conflict between the chair and US President Donald Trump. To Powell, this is an attempt to force monetary policy in the president’s interest. For market participants, this incurs inflation risks.

How Trump’s pressure on Powell could affect Fed credibility

“Under a worst-case scenario in which Trump succeeds and forces the Federal Reserve to lower interest rates, the Fed’s 2% inflation target may lose credibility,” explains Morningstar international economist Grant Slade.

“This would in turn de-anchor long-term inflation expectations from the central bank’s inflation target and make it significantly more difficult for the Fed to control price growth in the US economy,” Slade says. “This could result in greater volatility in US inflation going forward and place upward pressure on long-term Treasury yields as investors seek greater compensation for a more uncertain long-term inflation outlook.”

Investors flocked to gold, and the dollar fell against both the euro and the pound in Monday trading, as investors reassessed expectations over key economic metrics, including inflation and Treasury yields. In the United States, markets slid in early trading but recovered quickly, with the S&P 500 Index and Morningstar US Market Index both up 0.14% in midday trading. The technology-heavy Nasdaq 100 gained 0.41%.

In a brief interview on Sunday evening, President Trump appeared to deny all knowledge of the Justice Department’s subpoena, which threaten Powell with criminal prosecution. The incident is the latest in a prolonged series of political interventions from the Trump administration concerning the Fed and Powell.

Trump has repeatedly criticized the chair for not enacting lower interest rates. Last year, Trump declared Powell “a major loser” and called for his termination, but he later said he had “no intention” of sacking the veteran economist. In August, he targeted one of the central bank’s governors, Lisa Cook, citing a supposedly fraudulent mortgage application as grounds for her dismissal. Cook remains in place amid legal action on both sides.

In a video Sunday evening, Powell framed the incident in terms of the future of the central bank’s independence: “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure and intimidation.”

Is the Fed on course to lose its independence?

Fund managers aren’t jumping to the conclusion that Trump will end the Fed’s independence.

“The Treasury market hasn’t moved very much, partly because this isn’t the first shot across the bow,” says Trevor Greetham, head of multi asset at Royal London Asset Management. “Also, a soft labor market points to further Fed rate cuts anyway, with a 50-basis-point cut priced in.” After three rate cuts in 2025, Fed watchers generally expect one or two cuts in 2026, assuming the labor market continues to cool and inflation does not reaccelerate.

The events of late last week follow a series of international interventions by the Trump administration in the opening days of 2026, with military operations unseating the president of Venezuela and the additional suggestion that the US government would annex Greenland causing international political unease. Each action appears to lend weight to the belief that the president is willing to escalate complex situations in pursuit of an “America first” agenda.

The subpoena also comes as the Fed looks for its next leader when Powell’s tenure ends in May. Economist Kevin Hassett, who is broadly aligned with Trump politically, is seen as a frontrunner. “To win Trump’s nomination, Powell’s successor will have pledged to the president that he will ease monetary policy meaningfully,” says Mark Allan, senior economist at BNP Paribas Asset Management. “However, the chair is only one member of the broader FOMC. He won’t be able to walk into his first Fed meeting and order the rest of the committee to cut rates. But he will always take the dovish side of any policy argument. Whenever the Fed is faced with a tricky choice between cutting rates or not, investors can expect the next chair is likely to push for cheaper money.”

Analysts don’t expect the subpoenas to materially change Fed policy, but they could complicate the picture for the next chair. “While we do not believe this will alter the near-term course of monetary policy, it will make the next Fed Chair’s job that much harder to build a consensus among the 19 members of the Federal Open Market Committee,” wrote Wells Fargo economists on Monday. Much also depends on whether Powell stays at the Fed past his exit as chair; his mandate as a governor on the FOMC is not set to expire until 2028.

“It’s not easy to tell if the Fed will change under a new chair. It will also depend on whether Powell stays on the committee and whether the mortgage case gives Trump another scalp,” Greetham says.

Others see this escalation as part of a longer-term political plan to bolster the president’s approval ratings. “Taken together, these measures represent a calculated attempt to engineer a more favorable economic backdrop by mid-2026, bolstering approval ratings and mitigating the risk of electoral losses that could leave the president politically weakened for the remainder of his term,” says Patrick Farrell, chief investment officer at Charles Stanley.

What would an end to Fed independence mean for inflation?

In the longer term, uncertainty over Fed independence gives economists serious cause for concern about inflation projections and headline economic metrics. “The increasing pressure Trump is mounting upon the Fed offers a prime example of what economists refer to as the ‘time inconsistency problem,’” says Morningstar’s Slade. “Monetary policy influences economic activity—and thus price growth—with long and variable lags. This in turn leads to the risk that a central bank under political influence could choose to prioritize short-term economic growth at the expense of longer-term price stability."

Slade continues: “By contrast, independent central bankers are more likely than politicians to use monetary policy to tame inflation at the expense of short-run economic activity and employment levels, supporting the argument for central bank independence.”

That leaves the question of US economic growth and recession risk in the spotlight. “The central bank may be placed in the unenviable position of needing to engineer a ‘hard landing’ (a recession) to combat inflationary pressures in an attempt to restore the credibility of its 2% inflation target—something it wouldn’t necessarily need to do, had its independence from the executive branch of government not been pierced," Slade says.