Markets flinch as Trump DOJ targets Fed Chair

London Business School's Professor Richard Portes says the US Justice Department’s criminal investigation into Federal Reserve Chair Jerome Powell is “so over the top that it might really backfire,” even as markets begin to price in deeper risks to US monetary credibility.

“I confess that I am surprised that the initial market reactions seem mild, except for the debasement trade,” Portes told Newsweek on Monday. “This move is so extreme that it may end up discrediting Kevin Hassett as a potential successor to Powell, which would actually be a good outcome.”

Portes added that the episode could yet provoke a stronger political response. “I am heartened to see Senator Thom Tillis speak out. It would be good if a few more Republican senators, including some up for re-election, finally showed they have some spine.”

The comments came as global markets reacted to confirmation from Powell that the Department of Justice had opened a criminal investigation into his conduct, serving grand jury subpoenas on the Federal Reserve. In a rare video address on Sunday, Powell described the probe as unprecedented and warned it threatened the Fed’s ability to set interest rates free from political pressure.

“This is about whether monetary policy will be directed by evidence and economic conditions, or by intimidation,” Powell said.

Financial markets responded swiftly on Monday. The Dow Jones Industrial Average fell more than 400 points in early trading, while the S&P 500 dropped 0.3 percent and the Nasdaq slipped 0.2 percent. The US dollar weakened against major currencies, while gold and silver surged to record highs as investors sought safe havens.

Bank stocks were among the hardest hit. Citigroup fell almost 4 percent, while Capital One dropped close to 10 percent, reflecting growing concern over President Donald Trump’s parallel proposal to impose a one-year cap of 10 percent on credit card interest rates. Analysts warned that such intervention could restrict credit supply and undermine bank profitability.

Economists and market strategists increasingly interpret the DOJ’s move as a direct challenge to Federal Reserve independence, long viewed as a cornerstone of US economic stability. Ryan Monarch of Syracuse University said the episode risks triggering a broader “sell America” trade if investors conclude that future monetary policy will be politically constrained.

Market strategists echoed those concerns. “It’s not about Powell at this point,” said Jay Woods of Freedom Capital Markets. “It’s about the independence of the Fed, and markets don’t like uncertainty there.”

Krishna Guha of Evercore ISI described the situation as “unambiguously risk-off,” warning that global investors may begin applying a higher risk premium to US assets if the confrontation escalates.

Powell, first nominated as Fed chair by Trump in 2017, is due to see his term as chair expire in May, though his position as a Fed governor runs until 2028. Trump has repeatedly criticised Powell for resisting faster interest-rate cuts and has signalled his intention to name a successor.

Federal prosecutors are expected to continue examining Powell’s Senate testimony relating to a $2.5 billion renovation of the Fed’s Washington headquarters. Meanwhile, investors will closely watch the Federal Reserve’s next policy meeting later this month for any sign that political pressure is influencing decision-making.

For now, Portes believes the gamble may yet rebound on its architects. “This is so extreme,” he said, “that it could end up strengthening, rather than weakening, the case for central bank independence.”