Investors are nervous after news of a criminal investigation involving Federal Reserve Chair Jerome Powell came out. The situation escalated concerns that the Trump administration is trying to influence how the Fed makes decisions about interest rates. The Fed is supposed to work independently, without political pressure.
When that independence is questioned, markets tend to panic. The “Sell America” trade is a phrase investors use when they lose confidence in the US economy or its leadership. When this happens, they start selling US stocks, US government bonds, and the US dollar all at the same time. This kind of selling shows fear that America may no longer be the safest place to keep money.
That fear returned this week after the Trump administration stepped up pressure on the US central bank, the Federal Reserve.
What exactly happened with Jerome Powell?
Powell said the grand jury subpoenas relate to his June testimony in Congress about renovations to the Fed’s headquarters. But he said it should be seen “in the broader context of the administration’s threats and ongoing pressure.” This comes after earlier clashes, including attempts to remove Fed Governor Lisa Cook and repeated calls for sharp interest rate cuts.
“Any development that raises questions about the Fed’s independence adds uncertainty around US monetary policy,” said Gary Tan, portfolio manager at Allspring Global Investments to Bloomberg, which oversees more than $600 billion. “This is likely to reinforce existing trends of diversification away from the dollar and increase interest in traditional hedges such as gold.”
Why does the Fed’s independence matter so much?
The Federal Reserve controls interest rates, which affect everything from home loans to job growth. Investors trust the US system because the Fed is meant to make decisions based on the economy, not politics. When that trust is shaken, people especially investors start questioning whether US assets are still safe. The dollar is especially important because it is used in nearly 90% of global currency trades.
A similar wave of selling hit markets last year after President Donald Trump announced sweeping global tariffs. At that time, US bond yields jumped sharply and the dollar suffered its worst yearly fall since 2017.
Krishna Guha, vice chairman at Evercore ISI, told CNN that markets are bracing for a renewed “sell America” trade. “We expect the dollar, bonds and stocks to all fall in Monday trading in a sell-America trade similar to that in April last year at the peak of the tariff shock and earlier threat to Powell’s position as Fed chair, with global investors applying a higher risk premium to US assets,” Guha said. “Gold and other safe havens should rally.”
Guha added that investor anxiety around the Federal Reserve’s independence had been building for some time. “Our view has been that markets are concerned about threats to Fed independence but had become accustomed to hostile jawboning and would not trade on this fear absent some clear coordinating proof point,” he said. “The subpoenas and Powell’s response could very well be such a coordinating proof point.”
What are investors worried about now?
Some fear more volatility if tensions continue. JPMorgan Asset Management expects more pressure on bond markets and others see better opportunities outside the US. “The Fed subpoena is another example of how US assets are becoming less attractive,” said David Chao, global market strategist at Invesco Asset Management, which oversees more than $2 trillion in assets told Bloomberg. “Not only is the US retrenching behind its Fortress America borders, the country is also becoming more predatory.”