Markets Hit Records Despite Trump Fed Investigation Drama
Finn's Take· TL;DR- Stock markets hit record highs despite DOJ investigation into Fed Chair Powell and political pressure on central bank independence.
- Trump proposed 10% credit card interest rate cap, causing banking stocks to plumble as the move could cost banks roughly $100 billion annually.
- Gold prices and bond yields rose, signaling investor concerns that attacking Fed independence could backfire and prevent future interest rate cuts.
Record Rally Defies Political Turmoil
Wall Street delivered a remarkable performance Monday, with the S&P 500 tacking 0.2% onto its prior all-time high set on Friday . The Dow Jones Industrial Average recovered an early loss of nearly 500 points and added 86, or 0.2%, to its own record, while the Nasdaq composite gained 0.3% . This resilient comeback occurred despite unprecedented political pressure on the Federal Reserve that initially sent markets tumbling.
The dramatic intraday reversal showcased investors' complex relationship with political uncertainty. Stock market investors for now are shrugging off the Justice Department's investigation into Powell , though underlying tensions remained visible across other asset classes. Prices for gold and other investments that tend to do well when investors are nervous rose, while the value of the U.S. dollar dipped against other currencies .
Justice Department Targets Fed Independence
Over the weekend, the Federal Reserve's chair said the U.S. Department of Justice subpoenaed the Fed and threatened a criminal indictment over his testimony about renovations at its headquarters . In an extraordinary public response, Fed Chair Jerome Powell said his testimony and the renovations are "pretexts" for the threat of criminal charges, which he said is really "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" .
The escalation represents a historic challenge to central bank independence. Fed independence is considered a cornerstone of what makes US financial markets exceptional. Investors, economists and historians all regard an independent central bank as key to stable financial markets, as policymakers can set monetary policy without regard to political interests . White House press secretary Karoline Leavitt told reporters Monday that Trump did not direct his Justice Department to investigate Powell , though the timing suggests coordination.
Credit Card Crackdown Hits Banking Stocks
Trump simultaneously launched another financial sector offensive, proposing a 10% cap on credit card interest rates in place by Jan. 20 . The move sent banking stocks plummeting, with Synchrony Financial fell 8.4%, Capital One Financial sank 6.4% and American Express dropped 4.3% . The average interest rate on credit cards is between 19.65% and 21.5%, according to the Federal Reserve and other industry tracking sources. A cap of 10% would likely cost banks roughly $100 billion in lost revenue per year, researchers at Vanderbilt University found .
Wall Street executives pushed back forcefully against both initiatives. Bank CEOs warned the White House on Tuesday that Trump's actions will do more harm than good to the American economy . BNY Chief Executive Officer Robin Vince told reporters that going after the Fed's independence "doesn't seem, to us, to be accomplishing the administration's primary objectives for things like affordability, reducing the cost of borrowing, reducing the cost of mortgages, reducing the cost, of, everyday living for Americans" .
Market Signals Point to Deeper Concerns
While stocks recovered, other markets revealed persistent anxiety about Fed independence. The benchmark 10-year yield, which trades in opposite direction to prices, rose to 4.19%, near a one-month high. Bond yields' move higher suggests the Trump administration's action against the Fed could backfire, and rates may not start sinking as the president has demanded . The price of gold rose 2.5% to a record settlement of $4,614.70 per ounce , reflecting classic safe-haven demand.
Analysts warn Trump's strategy could ultimately prove counterproductive. Wall Street believes the plan to force the Fed into submission is unlikely to work. In fact, they fear it may backfire so spectacularly that interest rate cuts which would have happened under Powell will be nixed as the central bank asserts its independence . Trump may not have banked on the fact that the FOMC (even under a new Fed chair this year) might want to make a point of that independence, and go to lengths to demonstrate it. As UBS's Paul Donovan told clients this morning: "Any nominee from U.S. President Trump is likely to have to place additional emphasis on their independence to try and prove they are above politics" .