Markets still view Fed independence as intact—here’s why
Concerns about the Department of Justice investigation into Jerome Powell re-ignited public debate about Fed independence. But short- and medium-term bond yields suggest investors remain confident the Fed's independence is intact for now.
When it comes to Federal Reserve (Fed) independence, we’ve said markets will be the ultimate judge of the institution’s credibility. This week, the US Department of Justice’s announcement of a criminal investigation into Federal Reserve Chairman Jerome Powell re-ignited public debate, but market reaction has been decisive: Investors see central bank independence as very much intact, for now.
Why markets have stayed calm
In recent months, the Fed’s governance has faced challenges, yet at each critical moment, existing institutions have worked to preserve the status quo:
- In August 2025, when President Trump dismissed Fed Governor Lisa Cook, various courts imposed a stay that kept Ms. Cook in position
- In December 2025, the Fed Board of Governors reconfirmed 11 of 12 regional presidents for a new five-year term beginning March 2026, preserving a technocratic majority on the FOMC in the medium term
- This week, some in Congress expressed concerns about the investigation, including public statements from several key members of the Senate
What markets are signaling
Recent events may have paradoxically underscored the depth of the Fed’s institutional resilience. The combined actions of the courts, some in Congress, and the Fed’s own governance structure have provided a robust defense of the institution’s independence.
Whatever the motivations behind these events, the key takeaway is clear: the Fed’s reaction function remains intact for the medium-term, giving markets confidence to continue pricing future inflation according to standard parameters.
Any signs of concern?
In short, very few. Short- and medium-term US bond yields have traded in a stable range since Trump’s dismissal of Lisa Cook in mid-August (Figure 1). That stability suggests investors remain confident that the Fed’s reaction function is unchanged despite recent headlines.
It also reflects macro fundamentals consistent with the end of a rate-cutting cycle, as disinflationary and inflationary forces begin to offset each other. The yield curve as measured by the 10-30 spread has steepened (Figure 2), but we view this as driven more by fiscal concerns than fears about Fed independence—and broadly aligned with where we are in the monetary cycle.
Not fully in the clear yet
While the bank’s inflation-fighting ability is seen as intact, governance changes at the Fed this year introduce new uncertainties for pricing policy. The nomination of a new Fed Chair is likely to bring more split votes, something of a rarity for FOMC meetings until recently.
Public communication is also becoming more fragmented, with FOMC members more openly advocating their policy preferences. In the near-term, we don’t expect the rate path to shift, but balance sheet decisions are harder to anticipate at this stage. And, surprise vacancies could emerge, which would make it increasingly difficult for markets to predict Fed decision-making with confidence.
For more perspectives on the evolving policy landscape and its market implications, explore our latest macro insights.