The Oval Office’s plan to force the Fed into submission is unlikely to work, Wall Street believes. In fact, they fear it may backfire so spectacularly that interest rate cuts which would have happened under Powell will be nixed as the central bank asserts its independence.
Over the weekend, Fed chairman Jerome Powell confirmed the Department of Justice had served the Federal Reserve with grand jury subpoenas relating to his Senate Banking Testimony on the renovation of Fed buildings.
It was a move that realists may have seen coming—after all, Trump has already levelled legal threats against other members of the rate-setting Federal Open Market Committee (FOMC)—but is unprecedented nonetheless. It comes after a year of lobbying by Trump, who wants the FOMC to cut the base rate to foster economic activity and reduce borrowing costs, regardless of the inflation risk.
Throughout 2025, Powell attempted to avoid the political melee, even when Trump threatened to fire him multiple times. The FOMC did deliver rate cuts, though clearly not quickly enough for Trump. The resulting escalation from the White House is further proof of political intervention into the legally independent Fed, analysts and investors agree.
However, Trump may not have banked on the fact that the FOMC (even under a new Fed chair this year) might want to make a point of that independence, and go to lengths to demonstrate it. As UBS’s Paul Donovan told clients this morning: “Any nominee from U.S. President Trump is likely to have to place additional emphasis on their independence to try and prove they are above politics. This might impact future policy decisions.”
As Bernard Yaros, lead U.S. economist for Oxford Economics, observed in a note yesterday: “The criminal investigation … could even backfire by making officials more reluctant to cut rates in the coming months and years.”
But there’s also another unexpected fallout which Trump is unlikely to enjoy: Powell may choose to stay on as a bastion of independence after a new Fed chairman is nominated. While his time as Fed chairman expires this year, his term on the Board of Governors does not expire until 2028. “If Powell was looking for a reason to stay on as a Governor … this could be one,” noted Deutsche Bank’s Jim Reid this morning. “It’s very unusual to stay on but [former Fed Chairman Marriner] Eccles did so in 1948 for 3.5 years to help protect and secure Fed independence after the Treasury were trying to fund large post war time debts.”
An unpopular plan
Investors might have hoped Trump had learned his lesson when it came to meddling with the Fed: When he threatened to fire Powell earlier this year, markets shifted uneasily, and the Republican president was forced into a swift U-turn.
According to reports, the action taken this week hasn’t been hugely popular within the White House. Axios reported today, citing two anonymous sources, that Treasury Secretary Scott Bessent told the president that the investigation “made a mess,” which could be bad for financial markets.
Even if the chips fall in favor of President Trump and he successfully ousts both Powell and Governor Lisa Cook, as well as managing to insert a dovish Fed chairman at the head of the table, there’s still an economic fallout to be dealt with. This could include a weaker dollar, a steeper yield curve, and higher long-term inflation expectations, according to Thierry Wizman, global FX and rates strategist at Macquarie Group. If Trump succeeds, “it may result in a Fed that will be more pliant with respect to those White House wishes, especially if Congress concedes its role. That means a Fed that keeps interest rates lower than they otherwise would be.”
This means that inflation, held in check by higher rates, may increase in the longer view and, as such, “nominal assets, such as fixed-coupon long-term bonds, will look less attractive as stores of real value.”
