US
Heightened political threat to the Fed’s independence roil markets. The dollar, long-term Treasuries and US equity futures all fell while gold prices hit new record highs.
Fed Chair Jay Powell said on Sunday that the Fed had been served grand jury subpoenas, threatening a criminal indictment related to his testimony before the Senate Banking Committee last June. That testimony concerned the rising costs associated with the building renovation of two historic Fed buildings.
Powell has always avoided engaging with questions of political interference. This time he spoke with no holds barred, stressing that “This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings…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.”
Powell added “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.”
The subpoenas add to the growing list of political pressure targeting the Fed - including attempts to remove Fed governor Lisa Cook, sustained executive criticism on Fed policy decisions, and the choice of the next Fed chair. These actions threaten the Fed’s inflation-fighting credibility and can accelerate the dollar’s declining role as the primary reserve currency.
Fed speakers today include: Atlanta Fed President Raphael Bostic, who retires at the end of his term on February 28, Richmond Fed President Tom Barkin (non-voter), and New York Fed President John Williams. Markets will zero in on labor market remarks given conflicting signals from the December nonfarm payrolls report.
In our view, the downside risks to US employment continue to rise which underscores the need for additional Fed funds rate cuts. Excluding the non-cyclical health care and social assistance sector, private nonfarm payrolls fell -1.5k in December and are down on average -19.4k in the three months to December.
