The Price of Independence: What the Latest Fed Row Means for Markets and the Dollar

A Sunday Night Shock for Markets

The implications extend well beyond the personalities involved. At stake is the perceived independence of the Federal Reserve and, by extension, confidence in the US dollar as the world’s primary reserve currency. The concern is straightforward. A more politically pliable Fed could be pushed into cutting rates to an inappropriately low level, reopening the door to higher inflation, excessive borrowing, and a deterioration in long-term financial stability. For global investors, the credibility of US institutions is not just a philosophical issue, it is a core determinant into how US assets are priced.

Markets Stay Calm - But Not Complacent

And yet, the initial market reaction has been notably restrained. After brief wobbles, the S&P 500, the dollar, and US Treasury yields all sit broadly where they were before the announcement. Does this mean markets are relaxed about the prospect of monetary policy being steered from the White House? Far from it.

What markets appear to be doing instead is making a judgement about the credibility of the threat. Investors are not dismissing the principle at stake, they are discounting the likelihood that this attempt to undermine the Fed succeeds.

A Resounding Backlash

The past 48 hours have seen an unusually forceful backlash: The heads of eleven major central banks issued a joint statement expressing solidarity with Powell. In addition, every living former Fed Chair, alongside a number of former Treasury Secretaries from both sides of the aisle, have all publicly objected and warned that this represents the most brazen attack yet on an institution designed to sit above day-to-day politics. Even Wall Street, typically wary of antagonising the President, has begun to speak out, with JPMorgan’s Jamie Dimon emphasising the importance of Fed independence during a recent earnings call.

Checks, Balances, and the Limits of Presidential Power

Perhaps most strikingly, a small but growing number of Republican Senators have indicated they will refuse to back Trump’s nominee for Fed Chair, due to take office in May 2026, whilst the criminal investigation is ongoing. This is part of a broader erosion in party discipline, with lawmakers increasingly willing to break ranks as the President’s personal approval ratings slide and perceptions of political vulnerability grow. For markets, this matters. Trump’s ability to impose his will - even within his own party - is weakening, and the US system of checks and balances appears to be holding. This reduces the likelihood that political pressure on the Fed translates into lasting policy change, and helps explain why risk assets and the dollar have stabilised.

A Strategy That Could Backfire

Ironically, the strategy may even backfire on the administration. Threats to the Fed’s independence could encourage existing governors to circle the wagons and serve out their terms in full, limiting the ability to reshape the Board with more compliant appointees. Fed Chairs are not required to leave the Board when their term ends, and Powell has the option to remain a voting governor until 2028. While he has not yet indicated his intentions, exercising that right - alongside others doing the same - would make it considerably harder for the President to tilt the balance of power on a committee where decisions are made by majority.

So far, the administration has managed to appoint just one governor in its latest term, Stephan Miran, a consistent advocate of faster and deeper rate cuts. Recent events may narrow the window for similar appointments.

Risk Aversion on the Rise

Are we entirely in the clear? Not quite. For evidence, look at gold. Prices surged to record highs following the announcement, suggesting that while investors may view the probability of lasting damage as low, they still see the consequences as sufficiently severe to warrant insurance. Gold, in this sense, is pricing political tail risk, even as equities and the dollar revert to familiar ranges.

Ultimately, the courts appear unlikely to pursue a case based on what look like weak and highly politicised charges. Even if they did, the administration would still struggle to influence a Federal Reserve that has repeatedly demonstrated its institutional resilience in the face of intense pressure. For now, Fed independence looks assured.

Back to the Data

December’s non-farm payrolls report showed job growth of 50,000 - a relatively strong showing given the negative narrative surrounding the US economy. Inflation, meanwhile, remains above target at 2.7%, albeit below earlier peaks. Looking ahead, fiscal stimulus in the form of new tax cuts is set to provide an additional boost to growth in 2026. Stripped of political noise, these data hardly scream for aggressive rate cuts, and would ordinarily be supportive of the dollar.

The FX Takeaway

That is the tension markets will grapple with in 2026. Fundamentals argue for caution. Politics injects uncertainty. Even if the Fed ultimately retains its independence, the path there is unlikely to be smooth, and currencies tend to reprice political risk faster than economic reality. For corporates and investors alike, that makes a strong case for hedging against worst-case scenarios.

After all, the dollar does not need the Federal Reserve to lose its independence to weaken. It only needs investors to start questioning it.