Unprecedented! The Department of Justice is “holding a gun to the Fed’s head”—has the U.S. market’s “darkest hour” arrived?

The U.S. Department of Justice has launched a criminal investigation into Federal Reserve Chair Jerome Powell. This event marks an unprecedented escalation of conflict between the White House and the Fed, and the news triggered simultaneous sharp declines in U.S. stocks, bonds, and the dollar.

According to Reuters, the Department of Justice has issued a grand jury subpoena to the Fed regarding its headquarters renovation project, and initiated a criminal investigation into Fed Chair Jerome Powell. Powell subsequently issued a statement saying that the action was not about his congressional testimony or the renovation project itself, but stemmed from the Fed’s insistence on setting interest rate policy based on its own judgment.

The investigation is still in its early stages, and it is unclear whether it will enter formal prosecution procedures. However, from a market perspective, the key point is not the legal outcome itself, but rather that the independence of the central bank is for the first time directly drawn into the political game via a judicial investigation. Such changes do not need a final verdict; mere uncertainty is enough to affect pricing.

Market reaction directly confirms this logic: the dollar weakened, U.S. stocks and bonds came under pressure, while gold strengthened significantly. This asset price mix is not based on a reassessment of economic data (such as growth or inflation), but is a classic response by markets to a sudden rise in institutional and governance risk.

Short-term: Risk appetite contracts, “forex/precious metals react first”

In the short term, market reactions are highly focused, manifesting as the typical risk-off combination of a weaker dollar, pressured stock indices, and rising gold prices.

The driving force behind this change does not come from traditional economic data such as inflation or employment, but from the uncertainty shock brought by governance risk itself. Saxo Bank strategist Charu Chanana points out, such events inject new sources of volatility into markets, typically showing up first and most clearly in the foreign exchange and precious metals markets, and only later possibly transmitting to interest rate pricing.

Analysis on interest rates and macro strategies points to similar conclusions. Macro strategist Prashant Newnaha said the market is likely to view this incident as "the latest chapter in the narrative of Fed independence being undermined", exerting short-term pressure on the dollar and possibly limiting upward movement for interest rates, while precious metals stand to benefit. However, he also believes that in the initial phase, market shocks will be primarily about sentiment and risk preference adjustment.

Overall, at this initial stage, market trading behavior is more about lowering risk exposure in an environment of rising uncertainty and making defensive adjustments, rather than building directional positions based on a new macro narrative.

Medium-term: Reappraising the “institutional discount” of U.S. assets

If developments around the judicial investigation and political maneuvering continue, the market will inevitably enter a deeper phase: the systematic reassessment of the institutional stability of U.S. assets.

This would first strike the safe-haven foundation of the dollar. The dollar's global status relies not only on economic strength but also on the predictability of its institutional framework. If legal means become a potential avenue for interfering with the central bank, the dollar's credibility as the "ultimate safe haven" will be eroded, compounded by possibly rising inflation concerns, creating structural pressure on the exchange rate.

At the same time, the logic behind interest rate market pricing would also evolve. Doubts about central bank independence would directly convert to higher long-term risk premiums. Investors would demand additional compensation to address uncertainty that future policy might be distorted by non-economic factors. The result might be that, even as short-term rates fall on expectations of easing, long-term rates could remain firm due to this premium, leading to a “stress-induced steepening” of the yield curve.

For the stock market, the impact is more subtle and prolonged. The initial market reaction is usually higher volatility and a rush into safe-haven assets, not a reset of valuations. But over time, overall equity risk premiums will face systematic increases, especially for growth assets that rely on far-future cash flows—their valuations will face more lasting suppression. This does not stem from short-term earnings concerns, but from repricing the “institutional uncertainty” factor in the cost of capital.

Long-term: The key is not "Powell personally," but “his successor and institutional boundaries”

From a longer-term perspective, the market is shifting focus from the isolated event of the “investigation” to the evolution of institutional arrangements and personnel paths triggered by it.

Goldman Sachs chief economist Jan Hatzius’s latest view is somewhat representative. He notes that while the judicial investigation has intensified market concerns about central bank independence, he expects Powell to stick to a data-dependent decision-making model for the remainder of his term as chair (through May 2026).

However, the market’s analysis does not end there. A more complex key variable is entering the pricing framework: Powell’s term as a Fed governor could theoretically last until January 2028. Therefore, a core suspense is forming—will he choose to remain as a governor after his term as chair ends? How would this affect subsequent reshuffling of the Fed Board and power balances?

The market’s bargaining focus is subtly shifting. The key trading variables in the future may move from traditional "economic data and interest rate paths" to the “institutional timetable” interwoven with personnel arrangements and legal procedures. The clarity and evolution of this timetable will directly affect the market’s long-term pricing of monetary policy independence and continuity.

What “hard signals” should investors watch next?

Compared to policy statements, the market is now focused on subsequent verifiable developments, in order to judge the true scope and durability of this judicial investigation event. The core points of observation center on three dimensions:

First, procedural developments. The market is watching closely to see if the investigation progresses from the current “grand jury subpoena and threat of criminal prosecution” to formal charges or more coercive legal measures. Currently, Polymarket shows the probability of Powell being federally indicted by June 30 is priced at just 18%, indicating that investors are still cautious about any escalation of legal proceedings.

Second, whether there are structural cross-asset linkages. Whether the short-term risk-off reactions (dollar down, gold up, yield curve steepens) evolve into more persistent cross-asset pricing relationships is key in gauging risk persistence. The market needs to watch for fundamental changes in correlation among the dollar, gold, and long-term rates.

Finally, the personnel timeline in May. With Powell’s chair term ending in May 2026, the “personnel milestone” is already regarded as a key anchor for pricing. Trump has said he will soon announce his pick for Powell’s successor, with Hassett currently a frontrunner, while Powell’s term as governor could run through 2028.

Markets are trading the clarity of the successor’s selection, their policy stance, and the pace of congressional confirmation procedures as core macro variables affecting the “duration of central bank independence risk.” Their importance is now approaching that of inflation and employment data.

Risk Warning and DisclaimerThe market is risky; invest with caution. This article does not constitute personal investment advice, nor does it consider individual users’ special investment goals, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suited to their particular situation. Investing based on this article is at one’s own risk.