Sue Powell, overthrow the Fed? The market doesn't believe it!

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Although the U.S. Department of Justice subpoenaed the Federal Reserve, triggering significant market volatility in early trading, overnight U.S. stocks ultimately staged a V-shaped rebound, rising strongly from intraday lows and indicating limited investor concern over the Fed’s independence.

Barclays strategist Ajay Rajadhyaksha pointed out in a recent research report that investors should ignore political noise, because even if the White House intervenes in monetary policy through extreme measures, the bond market will act as the "ultimate gatekeeper," offsetting improper rate cuts by pushing up long-term interest rates.

The market reaction proved this view. According to Bloomberg data, after the DOJ subpoena announcement, the probability of a March rate cut actually fell from 25% to 20%, and long-term inflation breakeven rates were nearly unchanged. Republican Senator Thom Tillis has stated he will block all Fed nominations until DOJ issues are resolved, and the Senate Banking Committee’s narrow 13-11 majority means political deadlock may protect the Fed’s current status quo.

Barclays points out that the real macro risk is not political headlines, but the sustainability of the AI narrative. In 2025, the U.S. economy achieved growth of more than 2% despite a barrage of negative news such as trade wars, with third-quarter growth revised upward to 4.3%. The Atlanta Fed’s GDPNow model currently tracks growth above 5%.

Analysis suggests that this week’s focus should be on upcoming inflation data and bank earnings reports, rather than being distracted by political drama. Unless there is a military operation in Greenland or a large-scale intervention in Iran—earthquake-level events—simple political conflict is not grounds to exit risk assets.

DOJ vs Fed: An Ineffective Political Pressure

Overnight, U.S. stocks faced selling pressure in early trading, with stocks, bonds, and the dollar dropping simultaneously while gold and crypto surged. But, according to Bloomberg analyst Ye Xie, the stock market quickly rebounded strongly from its intraday low, reflecting three factors that diluted the true impact of political conflict.

First, Federal Reserve Chair Powell will step down in May, so targeting an outgoing Chair has limited impact on the overall trajectory of monetary policy. Second, although Powell’s chairmanship is ending, his term as a Fed governor lasts until 2028. Kalshi prediction markets show that recent developments may actually prompt Powell to remain as a governor to uphold Fed independence, with this probability rising from less than 20% to about 50%.

Third, DOJ investigations could backfire on Trump at the Fed nomination confirmation stage. The GOP holds just a slim 13-11 majority in the Senate Banking Committee, and Senator Thom Tillis has publicly stated he will oppose all Fed nominations until the legal issues are fully resolved. Senator Lisa Murkowski, who voted against Stephen Miran’s nomination last year, also supports Tillis’s decision.

Wells Fargo strategists point out that a greater risk to the Fed comes from oral arguments at the Supreme Court on January 21 regarding the case against Fed governor Lisa Cook. If the court sides with the Trump administration, it could trigger fluctuations in long-term breakeven rates by up to 20 basis points and a 2% decline in the dollar.

Barclays, however, believes the actual impact on monetary policy is nearly zero, or even the opposite. Investors need to understand that such public political pressure will not lead to softer near-term rate policy. Instead, to demonstrate its independence, the Fed may even lean marginally more hawkish. Market pricing already reflects this:

Bond Market Is the “Ultimate Gatekeeper”

In its macro outlook for 2026, Barclays presents a key logic: Even if the executive branch appoints only dovish members to the FOMC, they cannot override economic laws, because the bond market is the final arbiter.

Transmission mechanism failure: Unlike the UK or eurozone, the U.S. real economy is most sensitive to the “belly” of the yield curve. The largest source of household borrowing—the 30-year mortgage—has an average duration of 6-8 years; corporate debt issuance is also focused at the 5-7 year tenors.Inflation backlash: If a new committee sets the federal funds rate too low (below reasonable levels based on economic fundamentals), inflation worries will quickly heat up. This will cause long-term rates to spike, raising borrowing costs that really matter for the economy—completely offsetting the intended effects of rate cuts.

Additionally, Trump’s recently proposed measures are similarly questionable, including limits on credit card interest rates, banning corporate entities from home buying, and directing the government to support $200 billion in agency mortgage-backed securities purchases. Although MBS spreads initially narrowed by 10 to 15 basis points, the main holders of overweight MBS are fund managers and hedge funds. If spreads narrow too much, these relative value investors will simply reduce positions. More importantly, if concerns over Fed credibility drive the 10-year Treasury yield up by more than 15 basis points, all administrative interventions will mean nothing.

The Real Focus: AI and Economic Resilience

Barclays stresses that investors should learn from 2025’s lesson: pay attention to the data, not the noise. In 2025, despite headlines about trade wars, near-zero job growth, and a sluggish property market, the U.S. economy still achieved growth above 2%.

Even more striking are the data revisions. Third quarter growth for 2025 was recently revised up to 4.3%, surpassing the 3.8% in the second quarter. The Atlanta Fed GDPNow model now shows current tracked growth above 5%.

This amazing economic resilience is mainly thanks to the AI narrative. Barclays believes that compared to the political headlines, a sudden collapse in computation and reasoning demand—such as a sharp drop in AI adoption—would be the greater macro risk.

Looking to this week, the market will be determined by the data. Barclays believes the chance of a downside surprise in core CPI is currently underestimated by the market. At the same time, large banks will release earnings, and investors should closely watch remarks on credit card interest rate caps and the overall health of U.S. consumers.

The market reaction also confirms institutional investors’ composure. Long-term inflation breakeven rates are only slightly above last Friday’s close, and the 5-year, 5-year forward inflation breakeven—used as a long-term gauge—has not moved. Although gold rose 2% and the dollar was sold off, considering gold’s years-long bull market, this volatility is not extreme. If the bond market truly feared a permanent blow to Fed independence, the reaction would be far more intense.

Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute individual investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should determine whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investments made accordingly are at your own risk.```