‘Sell America’: Investors Sell Off U.S. Assets Amid Concerns Over the Loss of Fed Independence

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Whoever succeeds Jerome Powell as U.S Federal Reserve Chair in May understands one critical fact: Failing to act in line with President Donald Trump’s wishes could lead to criminal prosecution. This was the clear message in Powell’s unusual statement yesterday, where he pledged to keep setting monetary policy independently despite federal grand jury subpoenas probing his congressional testimony about alleged cost overruns in the Fed’s headquarters renovation.

“This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. … Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” .

“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.”

Overnight, markets reverted to “Sell America” mode as traders processed the possibility of an incoming Fed chair without independent credibility: [missing content] against a basket of global currencies; the yield on 5-year Treasuries spiked upward, a sign investors now view U.S. government bonds as suddenly riskier; gold futures—the classic safe haven—rose 2.21% today to hit an all-time high above $4,600 per troy ounce; and S&P 500 futures are down 0.66% this morning before the opening bell.

Wall Street analysts are nearly unanimous in their negative reaction to the news.

“The combined drop in the dollar, equities and Treasuries was a reminiscence of the ‘sell America’ days of last spring,” ING’s Francesco Pesole informed clients this morning. “The downside risks for the dollar from any indications of further determination to interfere with the Fed’s independence are substantial. Again, the bond market will be the most important barometer, both on the short end of the curve if markets price back in more rate cuts, or in the long end with potential stress signs on independence risks. A sharp steepening of the curve could take the dollar on a fall.”

Over at Invesco Asset Management, , “The Fed subpoena is another example of how U.S. assets are becoming less attractive … Not only is the U.S. retrenching behind its Fortress America borders, the country is also becoming more predatory.”

The subpoenas could also spark a surge in inflation, . “Markets will start to price in greater inflation expectations, inflation risk premium, and term premium if the Fed’s independence comes under further attack,” he told the Financial Times. “We don’t appear to have hit it yet, but every action is another step closer to it.”

Surprisingly, some analysts argue the investigation now makes near-term rate cuts less probable, as Powell and other Federal Open Market Committee (FOMC) members will be determined to show markets they are guided by data rather than legal threats.

“The move may also help Fed independence,” UBS’s Paul Donovan stated in an email. “Powell’s defiance might signal a reluctance to quit as a Fed governor this year. There are signs the Senate may delay confirming the nomination of a new Fed Chair. Concerns about market reactions and perceptions of institutional independence (in the wake of legal challenges) may become hawkish considerations in setting interest rates.”

ING’s Pesole added: “Markets aren’t ready to price in a loss of Fed independence just yet, either on the view that Powell will indeed remain firm in his policy views (as he’s pledged to), the FOMC won’t be heavily affected, or that the DOJ subpoenas aren’t likely to lead to an indictment.”

In any case, asset managers currently feel a strong sense of uncertainty. “The Fed as we have understood it as an institution over the past couple of decades is fading from view. It’s operating in a different environment,” ANZ’s chief economist Richard Yetsenga, .

Here’s a quick snapshot of market conditions ahead of New York’s opening bell this morning:

  • S&P 500 futures were 0.66% lower this morning. The prior session closed with a 0.65% gain.
  • STOXX Europe 600 fell 0.1% in early trading.
  • The U.K.’s FTSE 100 remained flat during early trading.
  • Japan’s Nikkei 225 was closed today.
  • China’s CSI 300 rose 0.65%.
  • South Korea’s KOSPI climbed 0.84%.
  • India’s NIFTY 50 was up 0.42%.
  • Bitcoin traded at $90.4K.