Heightened political threat to the Federal Reserve's (Fed) independence roil markets. The US Dollar (USD), long-term Treasuries and US equity futures all fell while gold prices hit new record highs. Fed Chair Jerome Powell said on Sunday that the Fed had been served grand jury subpoenas, threatening a criminal indictment related to his testimony before the Senate Banking Committee last June, BBH FX analysts report.

US employment weakness adds pressure for rate cuts

"Powell has always avoided engaging with questions of political interference. This time he spoke with no holds barred, stressing that 'This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings…The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President'. Powell added 'This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation'."

"The subpoenas add to the growing list of political pressure targeting the Fed - including attempts to remove Fed governor Lisa Cook, sustained executive criticism on Fed policy decisions, and the choice of the next Fed chair. These actions threaten the Fed’s inflation-fighting credibility and can accelerate the dollar’s declining role as the primary reserve currency."

"In our view, the downside risks to US employment continue to rise which underscores the need for additional Fed funds rate cuts. Excluding the non-cyclical health care and social assistance sector, private nonfarm payrolls fell -1.5k in December and are down on average -19.4k in the three months to December."