“This is the first time Powell fights back”

Federal Reserve Chair Jerome Powell addressed the latest salvo from the Trump Administration head on this past weekend. Releasing a video statement on Sunday, Powell explained that the US Department of Justice has served the Fed with grand jury subpoenas, a step towards criminal indictment. The investigation is ostensibly over a renovation project at Fed offices that President Trump has called “grossly mismanaged,” but in his video statement Powell alleged that the investigation is motivated by a desire to punish him, and the Federal Reserve, for not cutting interest rates as aggressively as Trump wanted him to.

Markets opened the day Monday with sell-offs across US assets, including a steep fall in the value of the US dollar, though by the afternoon the S&P 500 had rallied and recovered most of its losses. Markets have begun to digest this fight between Powell and Trump as a long-term story. Even if it doesn’t provoke immediate market impact, though, it’s a battle that may affect markets over the medium and long-term. Powell’s directness also represents something of a change to the passive dynamic that he took in 2025.

“This is the first time that Powell fights back, and this is significant in and of itself. The Fed and Powell have been sliding on those comments for a good while… but it seems like the first official punches back have been thrown from the Fed,” says Sébastien Mc Mahon, Vice-President, Asset Allocation, Chief Strategist, Senior Economist, and Portfolio Manager at iA Global Asset Management. “We have learned over the past year that these criminal investigations, like it was with James Comey and Letitia James, both times they were dismissed very easily by a judge. The track record of the DOJ on these is not so good. So there is a good chance that this is not as serious on the legal side, but it is very serious in the sense that this is signalling the next Fed chair that they had better stay in line.”

Mc Mahon explained that while the Trump administration’s attempts to bully Powell into compliance might not result in an immediate impact, he believes that the next chair to be appointed later this year will be under even greater pressure. At the same time, however, Mc Mahon believes that this open conflict could result in the Federal Reserve Open Markets Committee (FOMC) rallying around Powell, bucking the trend of committee disagreement that has been notable at recent FOMC meetings. Mc Mahon believes that the next Fed Chair will have a tough job signalling to markets, to the FOMC committee, and to the general public that they are able to maintain some degree of institutional independence.

As Powell stands up directly to the President, Mc Mahon notes that there are some other forms of internal resistance to this move. Republican Senator Thom Tillis of North Carolina, who sits on the Senate Banking Committee that approves any nominees to the Fed, has vowed that he will oppose the confirmation of any Fed nominee “until this legal matter is fully resolved.” That push to maintain Fed independence from other leading Republicans could cause Trump to walk this back slightly.

From an investor’s standpoint, Mc Mahon argues that the sell America trade has never been too far away from this market. He notes that following the announcement of tariffs in April 2025 investors pivoted quickly to a sell America stance that brought down US equities and the US dollar. That was saved by the so-called TACO trade and the resumption of the AI narrative, which saw positive US equity returns last year. While the downturn from this latest spat was very short-lived, Mc Mahon notes that there is always a risk in an expensive US equity market that investors may offload their US assets. He notes that the US dollar may be at particular risk if Fed independence comes under further threat.

A challenge to Fed independence also raises risks for the US treasury market, with the view that a Fed driven to appease Trump may spark higher inflation. Mc Mahon believes that this is maintaining a risk premium on interest rates and that investors need to be careful with the duration they hold.

“If you look at the fiscal situation in the US, which is in dire straits, if you look at the risks of losing fed credibility and the incurring inflation, I don't see anyone holding duration with conviction,” Mc Mahon says.

Non-US assets and traditional risk hedges, conversely, look good to Mc Mahon in this environment. He notes that gold may continue to do well as the USD struggles. Canadian and European equities also hold some promise, especially if investors take a negative view of the US dollar. Global corporate earnings look promising and while certain asset classes could outperform, Mc Mahon argues that there is a broad ex-US case to be made for investors.

Advisors now have the unenviable job of providing context and calm after another set of challenging news developments. Mc Mahon stresses the importance of a long-term message and a focus on the fundamentals, even as we keep a weather eye on a shaky horizon.

“When you invest for the long run every few years, there are always events that look like they're once in a lifetime, but usually markets tend to tend to continue, because it's a it's the ability of businesses, to generate and grow their earnings which dominates in the market,” Mc Mahon says. “Geopolitics will continue to remain a feature of the Trump administration. In 2025, though, we've confirmed again that markets are more resilient than the headlines. That would still be the case, and the US stock market is not the only game in town.”