Federal Reserve Chair Jerome Powell today said the US central bank had been served grand jury subpoenas from the Justice Department threatening a criminal indictment related to his June congressional testimony on ongoing renovations of the Fed’s headquarters.
In a statement released Sunday evening, Powell rejected the notion that the action was driven by his testimony or the renovation.
“Those are pretexts,” Powell said. “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.”
In essence, Fed Chair Powell is hitting back at the probe into his actions by federal prosecutors, saying the DOJ is targeting him because he defied President Trump’s preference for lower interest rates. The prospect of a more direct confrontation between the central bank and the government set off a fresh decline in US equity-index futures, lower Dollar and higher precious metals.
The US dollar is also sliding as investors reprice the risk premium for investing in the world’s largest economy, spurred by the latest evidence that Trump is willing to disrupt the Fed despite its crucial role in underwriting the credibility of US markets. The nation’s stocks are also set to underperform with the dollar outlook weighing down the market’s attraction for investors.
Equity investors were already being forced to cope with daily whiplash as Trump headline risks increase in frequency and strength from Venezualan military action to moves aimed at defense firms, mortgage rates, credit-card providers, the central bank and a range of other targets.
Gold is extending gains, putting $4,600/oz in play in the near term, as the latest news around the Fed and the Justice Department adds to its allure as a haven.
Bullion had already seen a decent lift this morning on the Iranian unrest, the US data from Friday, and recent signs of central-bank buying. The showdown around Fed Chair Powell underscores that the US central bank’s independence and credibility will be at the heart of investors’ concerns.
In these circumstances, havens will be among the biggest winners.
In bonds, benchmark Treasury futures are edging up as risk off gathers. Cash Treasuries won’t trade until London hours with Japan off for a holiday on Monday, but the gains in Australian government bonds seen so far highlight the message that sovereign debt is still regarded as offering something of a haven from geopolitical turmoil. Given Trump is also talking about possible Iran action and reiterating his determination to take over Greenland, the potential is for USD to extend its declines while Treasuries hold the line.
In Fx, macro traders are set to lean into US dollar shorts amid the risk that Powell is hampered in fulfilling his role as Fed chair. The Swissie and yuan stand out as the prime currencies for diversification away from USD.
Our own sense is Powell will face the grand jury and wont resign till his term as Fed Chair ends in May. This implies an uncertain environment for Dollar now due to lack of institutional credibility. Hence, we change our dollar bullish to dollar bearish view now. We maintain our bullish view on US equities as rate cut chatters pick up and long end bond yields higher as institutional credibility gets lower for US policy making.
