In its latest assessment, Bank of America warns that the Department of Justice's criminal investigation surrounding Federal Reserve Chairman Jerome Powell adds another layer of "political noise" to already sensitive policy communication. In its view, although the short-term market reaction seems restrained, this kind of uncertainty, once it enters the committee’s discussion framework, might make it more difficult to shape future rate cuts as outcomes purely "driven by data."
Markets Hold Steady, but Independence Debate Rekindled
Bank of America notes that following the news, long-term U.S. Treasury rates only fluctuated slightly, indicating investors have yet to price it as a systemic shock; for instance, the movement in the 30-year Treasury yield is described as only a matter of a few basis points. Bank of America interprets this as the "market currently choosing to ignore," but emphasizes that long-term rates are inherently more sensitive to central bank independence, and calmness does not equate to the disappearance of risk.
Bank of America's Core Concern: Investigation May "Raise" Internal Barriers to Rate Cuts
According to Bank of America, the investigation itself may not directly alter economic data, but it could affect the difficulty of "data interpretation." If external controversies persist, the more cautious faction within the FOMC might be more inclined to stress "wait and see," hence demanding a higher evidence threshold when discussing rate cuts. Bank of America also warns that if a more dovish leadership emerges within the Fed in the future, a new chairman attempting to promote rate cuts might have more difficulty persuading the committee and market to believe that such moves are purely due to objective changes in inflation and growth, rather than external pressures.
Key Timelines: Powell's Tenure Expectations and the "Cook Case" Hearing Date
Bank of America also shifts its focus to two timelines: one involves speculation surrounding Powell's tenure as it nears its end; the other concerns the Supreme Court's hearing schedule on the dispute over the term of Fed Governor Lisa Cook. According to Reuters, the Supreme Court will hear debates on January 21, 2026, regarding the Trump administration's attempt to remove Cook, which is seen as a critical test of the Fed's independence.
In line with this, prediction markets are quickly adjusting their bets: contracts cited by Bank of America's Polymarket report show investors’ expectations for Powell's departure from the board before a specific deadline have been downgraded (values change in real-time with trading).
Why the Investigation Captures the Market: From "Testimony Revision" to Policy Credibility
Numerous media background reports mention that this Department of Justice investigation is linked to controversies over Powell’s congressional testimony about the Fed's headquarters renovation project, focusing on renovation details, costs, and whether testimony descriptions pose legal risks. For the market, the real transmission chain is not the engineering itself, but that if the central bank chairman gets embroiled in a criminal investigation narrative, the credibility of monetary policy and the persuasive cost of "independent decision-making" will rise.
