Sudden Move Against Powell! Only 5 Months Left Until Replacement—Why Is Trump in Such a Hurry?

FX168 January 12— On Monday (January 12), global financial markets were unsettled. The immediate catalyst for this series of sharp fluctuations was the U.S. Department of Justice launching an investigation into Federal Reserve Chairman Jerome Powell, as well as escalating pressure from President Trump. For global investors, decoding the power struggle in Washington, in addition to monitoring economic data and the interest rate dot plot, has become a new and unavoidable lesson in asset pricing.

On Monday (January 12), global financial markets were uneasy: the U.S. Dollar Index posted its largest drop in three weeks, gold prices soared to all-time highs, and U.S. equity futures fell across the board. The immediate catalyst for these violent swings was the Department of Justice's investigation into Federal Reserve Chairman Jerome Powell and President Trump's escalating pressure campaign. The legal confrontation between the two sides over the Federal Reserve building renovation budget overruns has been widely interpreted by the market as an “ultimate showdown” concerning the independence of the Fed’s monetary policy. Its potential impact goes far beyond the event itself, shaking global investors’ core confidence in the stability of the U.S. system.

I. The Eye of the Storm: An “Weaponized” Building Renovation Audit

The apparent cause of this event was a costly renovation project at the Federal Reserve headquarters. The project began several years ago, aiming to repair and consolidate two historic buildings, with the original intention of integrating office space and saving long-term leasing costs. However, due to rising labor and material costs, historical preservation requirements, and the unexpected discovery of asbestos contamination, the total project budget soared far beyond initial estimates.

Senior officials in the Trump administration previously publicly criticized the project for “cost overruns of around $700 million and climbing,” insinuating there was extravagant waste. However, according to the Federal Reserve’s public statements and project documents, the so-called “rooftop terrace garden” is actually a green roof with rainwater management functions, and unnecessary features like the planned water feature have already been canceled. More importantly, the project has been regularly reviewed by the Office of the Inspector General within the Fed, and its budget authority falls within the Fed’s statutory purview.

Thus, when the Department of Justice recently issued a grand jury subpoena to the Federal Reserve, threatening to pursue criminal liability against Powell for his congressional testimony about the project last June, this professional audit quickly turned into a political event. In a rare public video statement on Sunday night, Powell directly pointed to the essence: “(The investigation) threatens the Fed’s ability to set interest rates based on its best judgment for the public, not as an outcome dictated by the president’s preferences... Those (building issues) are just excuses.” The market immediately grasped the deeper meaning: this is no longer a technical dispute over budget overruns, but .

II. The Critical Moment: Why Can’t Trump Wait These 5 Months?

Powell’s term as Fed Chair will expire this May, and Trump has publicly stated that he will nominate a supporter of “aggressive rate cuts” as the successor. So, ? Behind this are complex interplays of political cycles, economic demands, and power struggles.

Trump’s domestic policy agenda for his second term relies heavily on a loose monetary environment to support economic growth and ease the public’s borrowing cost burden. While markets previously expected the Fed to cut rates this year, major institutions (such as Goldman Sachs and Morgan Stanley) have now generally postponed their forecasts for the first rate cut to June. For Trump, waiting until his hand-picked “dovish” chair takes over would mean that the effects of rate cuts may not fully materialize before the November midterms. He needs the Fed to pivot to easing immediately and more quickly, to create a favorable economic atmosphere for the election. Market analysts point out,

Heavy pressure on the current chair sends a clear signal: future Fed leadership must align with the administration’s policy preferences. Peter Conti-Brown, a Federal Reserve historian at the University of Pennsylvania, points out that this is “a low point for President Trump’s administration and for the Fed’s history.” By challenging Powell’s authority, , clearing the way for a comprehensive reshaping of the Federal Reserve Board. In fact, Republican Senator Tillis has stated that he will oppose any Fed nomination by Trump until this matter is resolved.

As a professionally trained lawyer, Powell is well-versed in legal procedures and institutional boundaries. He chose to publicly and forcefully accuse political interference rather than compromise privately, not only to defend his personal reputation but also to safeguard the institutional legacy of the Fed. His counterattack has made the conflict fully public, forcing the market, Congress, and the judiciary to take a stand. As Damian Boey, portfolio manager at Sydney’s Wilson Asset Management, put it: “Chair Powell has changed his approach to Trump’s threats, this time choosing to address the elephant in the room head-on—that the Fed didn’t adjust rates to the president’s liking.”

III. Market Reaction: Risk Aversion Intensifies, “U.S. Assets” Face a Trust Test

1. The U.S. Dollar Index fell sharply, posting its largest drop in three weeks. This reflects investors hedging against the risks arising from the government’s ongoing assault on its core financial institutions. Karl Schamotta, chief market strategist at Corpay in Toronto, warned that this could have “unintended consequences,” including higher inflation expectations, erosion of the dollar’s safe-haven status, and ultimately a surge in long-term bond yields, which would paradoxically push up borrowing costs across the economy. Investors worry that politically driven monetary policy could undermine the very foundation of the dollar’s value.

2. Gold prices surged to record highs, a classic signal when market uncertainty spikes and the credit system is under threat. Meanwhile, U.S. equity futures declined, especially rate-sensitive sectors. Market volatility indicates that investors are re-evaluating whether the “everything rally” can continue in the face of institutional risk.

3. Although actual market swings on Monday were relatively mild, some analysts see this as evidence that Trump “lacks other levers,” and that rates will ultimately be determined by the majority of the Federal Open Market Committee (FOMC). However, more institutions are expressing long-term concerns. Richard Yetsenga, ANZ’s chief economist, noted that the trend is clear—“the technocratic Fed as we’ve understood it for decades is fading from view.” This means not only interest rate policy, but also the Fed's balance sheet management and bank regulatory functions, could enter a period of turbulence. Vishnu Varathan, head of macro research at Mizuho Bank Asia (ex-Japan), said: “The independence issue is now clear, and may have to be reassessed every few meetings going forward.”

IV. Outlook: An Institutional War of Attrition With No Winners

The investigation into Powell will face rigorous legal scrutiny to determine if it holds up. If legal proceedings are widely seen as improperly influenced by politics, their credibility will be seriously undermined. Meanwhile, Trump’s attempt to fire another Fed Governor, Lisa Cook, will soon be heard by the Supreme Court. The two cases are linked, .

Powell’s tough stance puts him on the moral high ground of defending central bank independence. This could encourage more members within the Fed to unite and resist external pressure, and even . This public conflict also forces both parties in Congress to take a position: whether the Fed’s independence can be maintained will depend on the effectiveness of checks and balances within the political system.

In the short term, uncertainty will dampen risk appetite and increase asset price volatility. In the long run, . If the market begins to doubt the Fed’s ability to resist political pressure and anchor inflation, the dollar’s international status and the financing costs of U.S. Treasuries could face structural challenges. As one economist said: “The market has already absorbed a lot of noise about the Fed and its independence, and may do so again, but at some point, things will break.”

The clash between Trump and Powell has far surpassed personal grievances or policy disagreements. It is a stress test of the core rules of U.S. economic governance—whether the central bank should be independent from short-term political pressure. Whatever the outcome of this “ultimate showdown,” financial markets have received a clear signal: the era of “technocrats” is fading, and the influence of geopolitics and domestic politics on monetary policy will be the key variable of the new era. For global investors, decoding Washington’s power struggles, in addition to tracking economic data and the rate dot plot, has become an unavoidable new lesson in asset pricing.