The Fed under attack

What It Covers

The Trump administration subpoenas Federal Reserve Chair Jay Powell and threatens criminal investigation, escalating attacks on Fed independence. Experts warn this threatens monetary policy credibility, potentially raising inflation expectations and long-term interest rates despite political pressure for cuts.

Key Questions Answered

• •Fed Independence Under Threat: Markets show 40 basis points of expected rate cuts under next chair, less than 10% chance of full percentage point cuts. Bond markets haven't reacted yet, suggesting investors may underestimate risks to Fed credibility and independence from political interference.
• •Credibility Loss Consequences: When central banks lose independence, inflation expectations rise as households and businesses anticipate sustained high inflation. This forces future Fed chairs to implement tighter monetary policy than otherwise needed to rebuild credibility, creating economic pain to restore trust in the institution.
• •Mortgage Rate Disconnect: Fed rate cuts don't directly lower mortgage rates because thirty-year mortgages track ten-year Treasury yields, not short-term Fed rates. Political interference that raises inflation expectations would increase long-term rates, making mortgages, business loans, and credit cards more expensive despite Fed cuts.
• •Small Business Labor Challenges: One in five small business owners cite labor quality as their top operational problem, with construction and professional services facing year-long searches for qualified candidates. Companies raise compensation to retain staff while tariffs force price increases, with some products rising from 275 to 300 dollars.