U.S. stock futures fell sharply Sunday evening after Federal Reserve Chairman Jerome Powell confirmed he was under investigation related to his testimony last June regarding renovations to Federal Reserve buildings.
THE New York Times reporting that the latest news of the investigation and subsequent revelations from Powell have rattled markets, reigniting fears that years of pressure from President Donald Trump on the Federal Reserve could now turn into a direct attack on its independence.
Futures contracts tied to the Nasdaq 100 led the decline, falling about 0.8%, with interest-rate-sensitive technology stocks bearing the brunt of the selling. S&P 500 futures were down about 0.5%, while Dow Jones Industrial Average futures fell about 0.4%, according to late-night prices.
Investors sought protection in traditional safe haven assets. Gold futures rose 1.7% to around $4,578 an ounce, while silver jumped more than 4%, reflecting renewed demand for protection against political and monetary instability. The U.S. dollar weakened slightly against several major currencies, including the Swiss franc and the Japanese yen.
After years of silence while Trump repeatedly mocked and threatened, Powell appeared to have reached a breaking point, issuing a rare and pointed statement.
He wrote that while “no one — certainly not the Chairman of the Federal Reserve — is above the law,” the attack must be seen in “the broader context of the administration’s continued threats and pressure.”
“This new threat is not about my testimony last June or the renovation of the Federal Reserve buildings… These 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 president’s preferences.”
Economists warn that if the executive branch manages to co-opt the Fed, it could create a “self-fulfilling prophecy” of higher inflation in the long run.
As Oxford Economics recently noted, any “crack in Fed independence” could spread quickly through markets and ultimately raise borrowing costs for the businesses the administration seeks to protect with low interest rates.
In a memo issued last July, when Trump publicly threatened to fire Powell, Deutsche Bank warned that such a move could cause serious market disruption.
“The currency and bond market may collapse,” the bank wrote, citing increased risks of inflation and financial instability. “The empirical and academic evidence on the impact of a loss of central bank independence is quite clear. »
Wall Street executives echoed these concerns. Brian Moynihan, chief executive of Bank of America, said recently that eroding the Fed’s independence would have serious consequences.
“The market will punish people if we don’t have an independent Fed,” Moynihan said.
