As you’ve likely read, the US Justice Department subpoenaed the Federal Reserve on Friday regarding the Fed’s headquarters renovation. Federal Reserve Chair Jerome Powell responded with a video statement on Sunday night, where he alleges that these actions are not in fact tied to the renovation, but rather a function of political pressure from the administration over the rate at which the Fed has been lowering interest rates.
We wanted to take a moment this afternoon to remind you of a few key items as it pertains to the Fed and its independence.
1 – The Fed’s Dual Mandate.
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
In addition to conducting the nation's monetary policy, the Congress has tasked the Fed with promoting the stability of the financial system, promoting the safety and soundness of individual financial institutions, fostering the safety and efficiency of payment and settlement systems, and promoting consumer protection and community development.
2 – The Fed is an independent federal agency.
The Fed cemented its independence in 1951 through the Treasury-Fed Accord. After World War II, when the Fed and Treasury worked closely together to support war-time funding and economic stability, there was a decision made that fiscal and monetary policy should remain separate. Since that time, with only a few notable exceptions, the Fed has conducted monetary policy largely independent of political influence. Erosion of that independence could have meaningful consequences, particularly given the tendency for political priorities to be shorter-term in nature than the Fed’s mandate. (We dove deeper into the history of the Fed in this blog post last July).
3 – The Fed Chair is not as powerful as he may seem.
While Jerome Powell is the current chairman of the Federal Reserve until his term is up in May of this year, he does not unilaterally control interest rate policy. Although the Fed Chair also serves as Chair of the FOMC, monetary policy decisions are committee driven. Importantly, while the Fed Chair is nominated by the President and confirmed by Congress, replacing the Chair does not automatically imply a change in the Fed’s independence or greater administrative control over monetary policy.
US President Donald Trump (who has denied any involvement in the aforementioned subpoena), among others, spent much of 2025 insisting that the Fed lower rates more rapidly than the FOMC was projecting. As a reminder, the Fed hiked rates at an historic pace between 2022 and 2023 to tamp down the highest inflation rates the US had seen since the 1980s. Subsequently, the Fed held that rate for over a year, before cutting by 1% at the end of 2024 and another 75 basis points across the final three meetings of 2025, landing at a target rate of 3.50% - 3.75% as we crossed into 2026.
The industry standard for projecting the Fed Funds rate is through the pricing of Fed Funds futures. As you may be aware, the CME Group has a handy, public tool named FedWatch that allows anyone to view current probabilities of interest rate changes looking out about two years into the future. Of note, current probabilities are about an even split between one, two, and three cuts by the end of 2026. Also of note, these probabilities do not jump in any meaningful fashion after May, when President Trump is set to nominate Jerome Powell’s replacement. We view this as market confidence in the Federal Reserve maintaining its independence but is something we’re watching.
Finally, as it pertains to the US Consumer, many may applaud any effort to increase the pace of rate cuts in the short term. However, it’s important for investors and consumers to remember that the Fed Funds rate is simply a benchmark, and more formally, the rate at which banks lend reserves to each other overnight – coined “the overnight rate.” While persistent concerns over housing unaffordability, for example, are noteworthy, these rates are correlated more closely with the 10Y Treasury Yield, which is determined by the market and cannot be directly impacted by the Fed. The 10Y Treasury Yield is considered to be more of a global benchmark for long term lending. In shorthand, a high or rising 10Y yield signals projected economic strength and/or higher inflation while a lower or falling 10Y yield signals economic weakness and/or contained inflationary expectations.
Markets opened modestly lower this morning but did not indicate significant concern around these developments. In our view, regardless of the political backdrop, U.S. market fundamentals remain solid, and any tension between the administration and the Federal Reserve is likely to have a limited and short-lived impact on markets.
If you have any questions, or would like to discuss further, please feel to reach out to me directly at ben.vaske@orion.com.