Fed Independence Under Siege: Powell Investigation Eclipses Soft Inflation Data

WASHINGTON/NEW YORK – The battle for the soul of the US central bank has escalated into a constitutional crisis, leaving foreign exchange markets to navigate a minefield of political risk that now outweighs fundamental economic data.

While Decembers CPI data showed inflation stabilizing, the narrative driving the US Dollar has shifted violently from monetary economics to institutional survival. The revelation of a Department of Justice (DOJ) investigation into Federal Reserve Chair Jerome Powell—ostensibly regarding headquarters renovation costs—is being widely interpreted as a direct assault on the Fed's ability to set interest rates without White House interference.

The 'January Hold' Consensus

Despite the political firestorm, the Federal Reserve appears to be digging in its heels. Minneapolis Fed President Neel Kashkari offered a staunch defense of Powell this week, explicitly characterizing the administration's actions as a proxy war over monetary policy.

Crucially for traders, Kashkari provided a clear forward-guidance signal, stating there is “no driver” to cut interest rates at the upcoming January FOMC meeting.

• The Data Reality: December 2025 CPI came in at 2.7% (Headline) and 2.6% (Core) year-over-year.
• The Labor Context: Unemployment has ticked up to 4.4%, indicating a cooling engine, yet not enough to force immediate easing.

Market analysts suggest that the political pressure may backfire, forcing the Fed to maintain a “higher for longer” stance simply to demonstrate its autonomy. “To cut rates now would look like capitulation to the Justice Department,” notes one senior FX strategist.

Market Reaction

The US Dollar has shown resilience, rebounding despite the softer inflation print. Traders are pricing in a complexity premium: the risk that the Fed's policy function is being distorted by a power struggle. The focus now shifts to the Supreme Court, which is set to hear arguments regarding the President's power to remove Fed governors—a verdict that could fundamentally alter the landscape of the global reserve currency.