Threat to Fed Independence Rocks U.S. Bond Market

By the Curmudgeon

Executive Summary:

This week marked an extraordinary escalation by the Trump administration and U.S. Justice Department (DoJ) against Federal Reserve Chairman Jerome Powell — a move experts warn could shatter the Fed’s independence and accelerate an authoritarian Executive branch power grab.

According to CNBC and The New York Times, the DoJ is pursuing a criminal investigation of Powell’s congressional testimony, despite no evidence of personal misconduct. The Wall Street Journal reported that Powell has resisted repeated White House pressure to cut interest rates, making the investigation look less like oversight and more like retaliation. TIME said it was an unprecedented threat to a sitting Fed chair.

Opposition Mounts Against DoJ Investigation of Powell:

The DoJ’s move raised profound questions about institutional independence at a moment when monetary credibility remains central to market stability.

l Fed Governor Michael Barr described the probe as "an assault on the independence of the Fed."

l St. Louis Fed President Alberto Musalem stressed that independent monetary policy is a valuable asset for stable inflation and employment.

l Former Fed Chairs Janet Yellen, Ben Bernanke, and Alan Greenspan, along with Republican and Democratic Senators Thom Tillis (R-NC), Lisa Murkowski (R-AK), and Chuck Schumer (D-NY), strongly condemned the DoJ probe as an attack on the Federal Reserve's independence, warning of negative economic consequences and vowing to block future Fed nominees.

Markets Reaction Last Week:

While the stock market yawned, other markets quickly reacted:

l Gold surged to fresh record highs above $4,600 per ounce, reflecting rising concern over political interference in monetary policy.

l Silver closed at ~$90 per ounce on Friday, rising $3.35 on the week.

l Bond investors demanded higher compensation for uncertainty as Treasury yields climbed. Longer-dated maturities reached four-month highs with the 10-year closing at 4.227% as shown in this chart:

Chart Courtesy of CNBC

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Factors Which Could Drive Up Treasury Yields:

Besides the looming loss of Fed independence was the news that dovish Kevin Hassett may be out as the next Fed chair and reports that the Treasury is looking to issue 7-year rates with quarterly re-openings. That could be a prelude for the Treasury to increase issuance or a shift away from bills to notes which would add to the supply overhang.

Several fixed income market strategists and technical analysts are forecasting a significant breakout to higher yields for U.S. Treasury notes and bonds, driven by expectations of "bear steepening" (long-term yields rising faster than short-term yields) due to inflation risks, supply concerns, and a perceived loss of Federal Reserve independence.

Despite the Fed Funds futures market forecasting two Fed rate reductions this year, one analyst doesn’t think there will be any. From this week’s Barron’s:

The Trump administration’s efforts to bludgeon the Federal Reserve into lowering its policy interest rates appear unlikely to have their desired effect. Indeed, they conceivably could backfire and forestall the rate cuts that the central bank officials and the markets anticipate for this year.

Michael Feroli, J.P. Morgan’s chief U.S. economist, looks for no further reductions in the Fed’s policy rate in 2026, with the next possible move to the upside coming in 2027. Improving job growth and gross domestic product, along with core inflation above 3%, argue against rate cuts.

Bearish Bond Market Commentary:

Friday’s Elliott Wave International Short-Term Update by Steve Hochberg stated:

“Based on the developing Elliott wave pattern, today’s upward push should continue as it is part of wave (iii) of iii (circle), which will be a strong rise. Initially, yields should carry above 4.500% with higher potential.”

Regarding the 30-year U.S. bond, Hochberg said, “The [U.S. Treasury Long Bond] price is on the precipice of a decline. Bonds rallied to 116^19.0 intraday yesterday, January 15, meeting the neckline of the head-and-shoulders pattern one final time. This “kiss goodbye” will lead to a decline that should draw prices about 3 points or so lower from current levels. The next downside target surrounds the area of the 112^24.0 level. There is greater bearish potential. A close above 116^19.0 will rescind the bearish forecast.”

Conclusions:

This convergence of key catalysts—uncertainty around a new Fed Chair appointment, the Supreme Court's tariff ruling, and Treasury's quarterly refunding—signals a potential end to recent U.S. bond market’s tight trading range, likely triggering significant volatility and a potential breakout in yields with lower note and bond prices in the near future.

Also, large and rising fiscal deficits necessitate increased issuance of Treasuries. Roughly $9–$10 trillion in U.S. debt is maturing in 2026, creating massive refinancing pressure. Analysts think that will force yields higher to attract buyers, with the10-year U.S. yield potentially moving back towards 4.5% and the long bond over 5%.

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Wishing you good health, success, and good luck. Till next time………………………………………………………………………….

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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