The criminal investigation into Federal Reserve Chairman Jerome Powell is once again testing the independence of the U.S. central bank, reinforcing the view among global investors that they need to diversify away from U.S. assets.
“That seems to be happening this morning,” Julien Lafargue, chief market strategist at Barclays Private Bank, told CNBC’s “Europe Early Edition” on Monday.
futures of S&P500, Dow Jones Industrial Average and Nasdaq All fell on Monday after the Justice Department launched an investigation into the $2.5 billion renovation of the Federal Reserve’s headquarters.
US 10 year government bond.
In a video statement tweeted by the Fed’s X account on Sunday, Powell said the investigation was “the result of the Fed setting interest rates based on its best assessment of what will serve the public, rather than following the wishes of the president.” President Donald Trump has previously accused Powell of cutting rates too slowly, which continue to burden consumers, especially in access to housing.
Mr. Lafargue called the investigation a “remarkable move” given that a new Fed chair will be announced in May, when Mr. Powell’s tenure as Fed chair ends.
Steve Englander, head of Global G10 Currency Research and North American Macro Strategy at Standard Chartered, said the investigation showed President Trump was trying to blackmail Powell with the “Maduro option,” a reference to how Venezuelan President Nicolas Maduro was captured over the weekend’s U.S. military attack and a warning that he could be removed from office through other means.
He also warned about the pace of the administration’s actions.
“The problem is the speed with which President Trump is trying to do it,” Englander said Monday on CNBC’s “Squawk Box Europe.”
“Obviously, he’s got midterm elections coming up. He wants to lower interest rates. I think he’s trying to intimidate the Fed by giving Chairman Powell the option of resigning and everything is gone, or by trying to get Maduro to fire him.”
“Unlike in the Lisa Cook case, this time there are actual accusations, not just ones that are being thrown around in the public eye.”
This has refocused attention on central bank independence, a key issue for investors throughout Trump’s presidency, and focused attention on U.S. 10-year Treasury yields and the potential for a broader decline in risk appetite heading into 2026.
“There will be a sentiment that investors need to diversify away from U.S. assets,” Lafargue said. “Over time, there could be some pressure on the long end of the yield curve.”
“Reverse effect”
Nabil Mirali, multi-asset overlay portfolio manager at Edmond de Rothschild Asset Management, said the president’s strategy is “paradoxically counterproductive.”
“By questioning the Fed’s independence, we are fueling upward pressure on interest rates, especially at the long end of the curve, which we continue to avoid with our allocations,” Mirari told CNBC in an email.
Focusing on where investors tilt their portfolios, Lafargue pointed to China as an “increasingly popular trade” and emphasized that the country is a continued beneficiary of the AI story.
Lafargue said investors were less optimistic about the eurozone, but added there were plenty of opportunities, particularly with respect to Germany’s infrastructure and defense stimulus, and that health care, materials and energy could recover in the UK.
He said tensions between President Trump and the Fed “are not a new story,” but added that investors need to understand “how quickly this is unfolding.” “I’ve heard that the U.S. administration has repeatedly criticized the Fed. Potentially, Davos could accelerate the nomination of a new Fed chair,” he added.
reliability gap
Mirari said the spat leaves Powell’s successor with “little credibility in the eyes of investors” and raises the risk that he will end up following Trump’s lead.
Mirari added: “The Trump administration’s recent attacks on the Fed confirm that its goal of challenging central bank independence has never been abandoned.”
—CNBC’s Tasmin Lockwood contributed to this report.
