"Sell-off in the US" makes a comeback, Powell's investigation triggers a "triple kill" in stocks, bonds, and currencies

Written by: Li Jia

Source: Wall Street Journal

The U.S. Department of Justice has launched an investigation into Federal Reserve Chair Jerome Powell, sparking market concerns over the independence of the central bank. Safe-haven sentiment surged, pushing spot gold temporarily above $4,620 per ounce, hitting a record high with a daily increase of 2.4%. The dollar, U.S. stock futures, and U.S. Treasuries all declined simultaneously, reigniting market fears of “selling off American assets.”

On January 12, according to Bloomberg, this investigation is the latest offensive by the Trump administration against the Federal Reserve, which previously included attempts to dismiss Board Member Lisa Cook and repeated calls for aggressive rate cuts. The sensitive issue of the Fed’s independence and its impact on U.S. assets have once again become focal points of investor debate.

According to sources cited by The New York Times, the investigation was initiated by the U.S. Attorney’s Office for the District of Columbia, focusing on the $2.5 billion renovation project at the Fed headquarters and whether Powell committed perjury before Congress regarding the project scope. Powell denied the allegations in a statement, stating, “The threat of criminal charges is a consequence of the Fed’s insistence on setting interest rates based on public interest rather than presidential preferences.”

This escalation is prompting investors to reassess whether to reduce their risk exposure to U.S. assets and the dollar. This risk-averse logic echoes the trading theme that dominated global markets when Trump announced comprehensive tariffs in April last year.

Safe-haven assets are in high demand as U.S. stocks, bonds, and the dollar all decline

Currently, financial markets are exhibiting a typical safe-haven trading pattern, with U.S. equities, bonds, and the dollar under pressure, while funds flood into precious metals.

In terms of risk assets, U.S. stock index futures declined across the board, with S&P 500 futures down 0.5% and Nasdaq 100 futures down 0.7%. Long-term Treasury bond selling pressure is significant, with the 10-year U.S. Treasury yield rising 3 basis points to 4.20%. The dollar index fell 0.4%, marking the largest single-day decline in nearly three weeks.

Gold and silver prices surged sharply, hitting new highs. Spot gold rose above $4,620 per ounce, up 2.44% intraday, with a cumulative increase of over $300 since the beginning of the year; spot silver jumped 7% to a historic high of $85.24.

Many institutions believe that the driving force behind market volatility is a reassessment of the political risks facing the Fed. Gary Tan of Allspring Global Investments pointed out:

“Any development that raises questions about the Fed’s independence will increase uncertainty in U.S. monetary policy, potentially strengthening the diversification trend of the dollar and boosting demand for traditional hedges like gold.”

Fidelity International fund manager Mike Riddell added:

“Historical patterns are repeating — political pressure on the Fed often means a weaker dollar, rising long-term yields, and increasing inflation expectations.”

John Woods, Chief Investment Officer of Lombard Odier Asia, stated:

“Gold is the primary geopolitical risk asset, surpassing all other categories. The geopolitical risks currently facing the market are already excessive.”

Institutions warn of a shift in asset allocation

Investment firms generally believe that this escalation will intensify market volatility and could have profound long-term effects on monetary policy.

JPMorgan Asset Management noted that, based on more aggressive rate cut expectations, the U.S. Treasury yield curve could further steepen, with long-term rates rising faster than short-term rates. Lombard Odier expects greater pressure on the dollar and U.S. Treasuries.

David Chao of Invesco Asset Management said: “The subpoena from the Fed is another example of the declining attractiveness of U.S. assets.” Previously, Francois Villeroy de Galhau, a member of the European Central Bank Governing Council, warned that criticism from the Trump administration toward the Fed threatens the dollar’s global standing.

Kevin Thozet, a member of the Carmignac Investment Committee, stated: “The risk is that the confrontation between the White House and the Fed will escalate fully over the next few quarters.” He warned that the likelihood of Powell being supported by Trump increases, which could push inflation expectations higher.

Investigation focuses on renovation project overruns

According to The New York Times, the Federal Prosecutor’s Office led by Trump ally Jeanine Pirro is examining whether Powell misled Congress regarding the renovation project at the Fed headquarters. The project began in 2022 and is scheduled for completion in 2027, with current budget overruns of approximately $700 million.

The Fed explained that the overruns were due to rising costs of materials, equipment, and labor, as well as unforeseen issues such as asbestos and soil contamination. The Fed pointed out that these two buildings have not undergone a comprehensive renovation in nearly a century.

At a congressional hearing last June, Powell denied claims that the 2021 proposal included private elevators, restaurants, and new marble facilities for senior decision-makers. He emphasized that the project plans have “evolved continuously,” and some initially planned features have been canceled.

In his latest statement, Powell said the U.S. Department of Justice has issued a grand jury subpoena to the Fed and threatened criminal charges over his congressional testimony. He stated he will continue to serve in his role confirmed by the Senate. Trump, however, denied any connection to the DOJ subpoena, claiming, “I have no knowledge of it.”

Fed personnel changes imminent

This investigation coincides with Powell’s term as Fed Chair ending in May this year. Trump announced last week that he has selected a successor, expected to be announced soon. Currently, his top candidate is Chief Economic Advisor Hasset.

Although Powell’s chairmanship will end in May, his term as a Board member will continue until January 2028. Powell has not disclosed whether he plans to remain at the central bank beyond this year.