US equity markets faced substantial pressure as news emerged of a Department of Justice criminal investigation into Federal Reserve Chair Jerome Powell. The development sparked widespread selling across major indices, with banking sector stocks bearing the brunt of investor concerns. Market participants viewed the investigation as a significant escalation in political pressure on the central bank, raising questions about monetary policy independence.

Market Performance Overview

Major US indices posted notable declines during the trading session:

The Cboe Volatility Index moved higher as traders sought protective measures against potential market turbulence. The selling pressure reflected investor uncertainty about the implications of the investigation for Federal Reserve operations and monetary policy direction.

Banking Sector Under Pressure

Financial stocks experienced the most significant declines, with major banking institutions posting substantial losses:

The banking sector's underperformance was amplified by President Trump's proposal to cap credit card rates at 10.00% for one year. Market analysts expressed concerns that such restrictions could limit lending activities and negatively impact bank profitability, creating additional headwinds for financial institutions.

Powell's Response and Fed Independence

Federal Reserve Chair Jerome Powell addressed the investigation through a direct video statement, emphasizing the central bank's commitment to independence. Powell stated: "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."

Powell stressed his determination to resist external pressure, with his current term as Fed Chair scheduled to expire in May. The statement underscored ongoing tensions between the Federal Reserve's traditional independence and political attempts to influence monetary policy decisions.

Market Outlook and Policy Implications

The investigation marks a notable shift from earlier periods when markets largely ignored political pressure on the Federal Reserve. Current market expectations suggest the central bank may pause further rate cuts while monitoring inflation trends and broader economic conditions.

Critics of the proposed credit card rate cap warn that such measures could restrict lending availability, potentially harming both consumer access to credit and overall banking sector performance. The combination of regulatory uncertainty and political pressure has created a challenging environment for financial markets and monetary policy implementation.

German government bond yields declined in early trading on Monday, diverging from U.S. Treasury yields which rose following escalating tensions between the Trump administration and Federal Reserve leadership. The Trump administration has threatened Fed Chair Jerome Powell with criminal indictment, creating fresh uncertainty about the independence of the world's most influential central bank.

Federal Reserve Under Pressure Over Renovation Costs

Powell disclosed on Sunday that the Federal Reserve received subpoenas from the Department of Justice concerning his remarks to Congress last summer regarding cost overruns for the Fed's headquarters renovation project in Washington. The project, originally budgeted at ₹20,875 crore ($2.5 billion), has become a focal point of criticism from the Trump administration.

European Markets Benefit from U.S. Uncertainty

The renewed attack on Fed independence has minimal direct implications for European Central Bank monetary policy conduct. However, the developments have damaged investor confidence and raised concerns about U.S. reliability as an investment destination, channeling more capital into European markets.

"Concerns about Federal Reserve independence have resurfaced amid an intensifying Trump-Fed feud, adding another layer of uncertainty to the rates outlook and risk sentiment," noted Saxo Bank chief investment strategist Charu Chanana.

Eurozone Bond Performance

German 10-year yields, which experienced their largest weekly decline since October last week, reversed early gains to close modestly lower at 2.821%. Within the broader eurozone, both Italian and French 10-year yields rose nearly 2 basis points each, reaching 3.477% and 3.544% respectively.

Market Outlook and Fed Policy Expectations

Recent U.S. economic data indicates continued job generation with moderating inflation, suggesting limited scope for the aggressive rate cuts President Trump desires from the Federal Reserve. Market participants currently expect no rate cuts until June, a timeline that Sunday's developments have not altered. The week ahead is expected to bring additional bond issuances from Germany, Austria, and Italy, providing further opportunities for European market activity.