Sue Powell, overturn the Federal Reserve? The market doesn't believe it!

Despite the U.S. Department of Justice's subpoena of the Federal Reserve causing significant market fluctuations in early trading, U.S. stocks ultimately staged a V-shaped rebound overnight, showing a strong recovery from intraday lows, indicating limited investor concerns about the Fed's independence.

Barclays strategist Ajay Rajadhyaksha analyzed in a recent research report that investors should ignore political noise, as even if the White House intervenes in monetary policy through extreme measures, the bond market will play the role of the "ultimate gatekeeper" by pushing up long-term rates to offset the effects of inappropriate rate cuts.

Market reactions confirmed this judgment. According to Bloomberg data, after the DOJ subpoena news was released, the probability of a rate cut in March actually decreased from 25% to 20%, and the long-term inflation breakeven rate remained almost unchanged. Republican Senator Thom Tillis has stated he will block all Federal Reserve nominations until the DOJ issues are resolved, and the narrow majority of 13 to 11 in the Senate Banking Committee suggests that the political deadlock may protect the current state of the Fed.

Barclays pointed out that the real macro risk is not political headlines, but the sustainability of the AI narrative. The U.S. economy is expected to achieve over 2% growth in 2025 despite negative news bombardments such as trade wars, with the growth rate for the third quarter being revised up to 4.3%. The Atlanta Fed's GDPNow model shows that the current growth tracking value exceeds 5%.

Analysts believe that this week's focus should be on the upcoming inflation data and bank earnings reports, rather than being led by political theatrics. Unless there are seismic events such as military actions in Greenland or large-scale interventions in Iran, mere political conflicts do not constitute a reason to withdraw from risk assets.

DOJ vs. Federal Reserve: An Ineffective Political Pressure

Overnight, U.S. stocks faced selling pressure in early trading, with stocks, bonds, and the dollar all declining, while gold and cryptocurrencies surged. However, according to Bloomberg analyst Ye Xie, the stock market subsequently rebounded strongly from its intraday lows, reflecting that three factors weakened the actual impact of the political conflict.

First, Federal Reserve Chairman Jerome Powell will step down in May, and attacking the soon-to-be-departed chairman has limited influence on the overall trajectory of monetary policy. Second, although Powell's term as chairman is ending, his term as a governor will last until 2028. Predictive market Kalshi data shows that the latest developments may actually encourage Powell to remain as a governor to defend the Fed's independence, with this possibility rising from less than 20% to about 50%.

Third, the DOJ investigation may backfire on Trump during the confirmation process for Fed nominations. The Republicans hold only a narrow advantage of 13 to 11 in the Senate Banking Committee, and Senator Thom Tillis has publicly stated he will oppose all Fed nominations until the legal issues are fully resolved. Senator Lisa Murkowski, who voted against Stephen Miran's nomination last year, has also expressed support for Tillis's decision.

Wells Fargo strategists pointed out that the greater risk to the Fed comes from the oral arguments held by the Supreme Court on January 21 regarding the case against Fed Governor Lisa Cook If the court supports the Trump administration, it could trigger fluctuations in the long-term breakeven interest rate of up to 20 basis points, as well as a decline of about 2% in the dollar.

Barclays believes that the actual impact on monetary policy is almost zero, and may even be counterproductive. Investors need to understand that this public political pressure will not lead to a softening of interest rate policy in the near term. On the contrary, to prove its independence, the Federal Reserve may even marginally lean towards a hawkish stance. Market pricing has already reflected this:

The Bond Market is the "Ultimate Gatekeeper"

Barclays presents a key logic in its 2026 macro outlook: even if the administration replaces all members of the Federal Open Market Committee with doves, they cannot go against economic laws, as the bond market is the ultimate arbiter.

• Transmission Mechanism Failure: Unlike the UK or Eurozone, the US real economy is most sensitive to the "belly" of the yield curve. The largest source of borrowing for US households—the 30-year mortgage—typically has an average duration of 6-8 years; US corporate bond issuance is also concentrated around the 5-7 year points on the curve.
• Inflation Backlash: If the new committee sets the federal funds rate too low (below a level reasonable for economic fundamentals), inflation concerns will quickly heat up. This will lead to a surge in long-term rates, thereby increasing the borrowing costs that are truly important for the economy, completely offsetting the intention of rate cuts.

Additionally, a series of measures recently proposed by Trump are similarly questionable in effectiveness. These include capping credit card rates, prohibiting corporate entities from buying homes, and directing the government to support companies in purchasing $200 billion in mortgage-backed securities. Although MBS spreads initially narrowed by 10 to 15 basis points, the main players currently overweighting MBS are fund managers and hedge funds. If the spread narrows too much, these relative value investors will directly reduce their positions. More importantly, if concerns about the Federal Reserve's credibility lead to a rise in the 10-year Treasury yield of more than 15 basis points, all administrative interventions will be in vain.

What Truly Matters is AI and Economic Resilience

Barclays emphasizes that investors should learn from the lessons of 2025: focus on data rather than noise. Despite headlines bombarding the US economy in 2025 with trade wars, nearly zero job growth, and a sluggish real estate market, it still achieved over 2% growth.

Even more striking is the data revision. The growth rate for the third quarter of 2025 has recently been revised up to 4.3%, higher than the 3.8% in the second quarter. The Atlanta Fed's GDPNow model shows that the current growth tracking value exceeds 5%.

This remarkable economic resilience is primarily attributed to the AI narrative. Barclays believes that compared to political headlines, a sudden collapse in computing power and reasoning demand, such as a sudden drop in AI adoption rates, poses a greater macro risk.

Looking ahead to this week, market trends will be determined by data. Barclays believes that the likelihood of a downward surprise in core CPI is currently underestimated by the market. At the same time, major banks will release earnings reports, and investors should pay close attention to comments regarding credit card rate caps and the overall health of American consumers The market reaction also confirms the resilience of institutional investors. The long-term inflation breakeven rate is only slightly higher than last Friday's close, and the 5-year, 5-year forward inflation breakeven rate, which serves as a long-term market expectation indicator, has not changed at all. Although gold rose by 2% and the dollar was sold off, considering that gold is in a multi-year bull market, this fluctuation is not extreme. If the bond market were truly worried about a permanent blow to the independence of the Federal Reserve, the reaction would be much more severe than it is now