Why Is the Market Not Reacting to the Attack on the Fed?
Explaining the Market Rally
The Department of Justice's investigation into Jerome Powell poses a direct threat to the Federal Reserve's independence. Executive branch interference of this magnitude is unprecedented in modern U.S. economic history. Under normal circumstances, markets would react negatively, but they didn’t.
Markets closed in the green yesterday. All major indices rose, appearing to largely shrug off the administration’s actions. That reaction ran counter to expectations, so the obvious question became: why?
What Happened
Several developments helped calm markets:
Powell’s response was firm and unambiguous. His statement sent a clear signal that he and the Fed intend to maintain institutional independence.
The Senate pushed back. Led by Thom Tillis, the Senate signaled resistance. Tillis stated he would block any Trump-appointed Federal Reserve nominees, including for chair, following revelations that the Justice Department is investigating Powell for potential perjury charges. Several Republican lawmakers crossed the aisle in support.
Global central banks closed ranks. A joint statement backing the Fed’s independence is expected to be issued under the Bank for International Settlements banner and opened for signature by central banks worldwide.
Former Fed leaders spoke out. The past three Federal Reserve chairs, along with ten former economic policymakers appointed by both Republican and Democratic administrations, publicly condemned the probe.
Markets bought the dip. Stocks did fall in early trading. The Dow Jones Industrial Average was down roughly 300 points shortly after the open. But dip-buyers quickly stepped in, reversing losses by the close.
Where Did Weakness Appear?
While equities recovered, stress showed up elsewhere.
The U.S. dollar weakened against major currencies. The dollar index fell 0.24%.
The benchmark 10-year Treasury yield rose to 4.19%, near a one-month high, signaling rising inflation expectations.
Gold and silver continued to rally as investors sought inflation hedges and safe-haven assets.
The Bottom Line
So why did stocks end the day higher?
Investors appear to believe there is enough institutional and political pushback to prevent real damage to Fed independence. Or they interpret the episode as increasing the odds of looser monetary policy and lower inflation in the future.
Stocks may be calm for now.
But currency markets, bond yields, and precious metals are quietly telling a more cautious story.
That divergence is worth watching.