The U.S. Department of Justice's criminal investigation into Federal Reserve Chair Jerome Powell has reignited investor discussions about portfolio diversification away from American assets, even as financial markets have maintained relative stability in response to the probe.

Investigation Revives 'Sell USA' Strategy Debate

The DOJ probe has brought renewed attention to the "Sell USA" trade strategy, which involves reducing exposure to American equities, bonds, and the dollar amid growing concerns over institutional and political risks. This investment approach previously gained traction during tariff-driven market volatility but failed to generate sustained capital outflows from U.S. markets.

The latest investigation has raised fresh questions about the long-term independence of the Federal Reserve, a cornerstone of American financial stability. According to Reuters, the episode represents an escalation in President Trump's ongoing criticism of Powell, whom he has repeatedly accused of being slow to implement interest rate cuts.

Market Response and Stakeholder Pushback

Despite the controversy surrounding the investigation, immediate market reactions have remained subdued. Key market indicators show measured responses to the probe:

Investors, policymakers, and financial leaders have mounted strong opposition to the investigation. Powell himself has sharply criticized the move, while support has come from multiple quarters including former Federal Reserve chairs, senior lawmakers, global central bank leaders, and top Wall Street executives. This widespread resistance reinforces the view that direct interference with monetary policy would face significant institutional pushback.

Long-term Implications and Risk Assessment

While immediate market disruption has been limited, investment strategists are warning of potential longer-term consequences. Reuters reports growing concerns that even incremental erosion of confidence in Federal Reserve independence could gradually prompt global investors to reassess the premium they assign to U.S. assets.

Rather than triggering sudden selloffs, such shifts could unfold gradually over time as risk perceptions accumulate. This measured approach reflects how markets have become less reactive to policy shocks, with years of policy uncertainty conditioning investors to expect elevated volatility.

Structural Factors Supporting U.S. Assets

Several fundamental strengths continue to underpin American asset allocation despite institutional concerns:

• Resilient economic growth momentum
• Easing inflation pressures across key sectors
• Strong investment flows linked to artificial intelligence development
• Deep and liquid financial market infrastructure

These factors have helped maintain confidence in U.S. equities and credit markets, outweighing institutional concerns for many global investors.

Credit Rating and Institutional Credibility

Fitch Ratings has emphasized that central bank independence remains a critical pillar supporting the United States' AA+ sovereign credit rating, according to Reuters. The rating agency's position highlights how institutional credibility directly impacts the country's borrowing costs and financial market standing.

Analysts caution that while markets may tolerate short-term uncertainty, persistent pressure on key institutions could eventually demand higher risk premiums for U.S. assets. The primary concern lies not in any single event, but in the cumulative effect of repeated challenges to established institutional norms.

Investment Strategy Implications

The Federal Reserve investigation has clearly reintroduced diversification into global investment conversations, though not as an urgent call to exit U.S. markets. Instead, it serves as a reminder that even the world's deepest and most liquid financial system faces credibility risks that investors must consider in their portfolio allocation decisions.

For now, market participants appear content to balance America's economic strengths against rising political and institutional concerns, maintaining their investment positions while monitoring developments closely.

US consumer price inflation edged higher in December as temporary distortions linked to government shutdowns faded, reinforcing expectations that the Federal Reserve will maintain its current interest rate policy. The Consumer Price Index rose 0.3% in December, matching economist expectations, while annual inflation remained steady at 2.7%, unchanged from November.

December Inflation Data Overview

The Labor Department's Bureau of Labor Statistics revised its estimates for price increases between September and November to approximately 0.2%, suggesting a smoother underlying inflation trend than earlier data indicated. The December figures confirmed that inflation is neither accelerating sharply nor cooling fast enough to prompt immediate monetary policy changes.

Market Response and Federal Reserve Implications

Financial markets reacted cautiously to the inflation report, with US equity futures paring earlier losses as investors took comfort in signs of stabilizing rather than reaccelerating inflation. Treasury yields declined, with the benchmark 10-year yield easing to around 4.17%, reflecting modest relief that inflation did not surprise on the upside. The US dollar softened slightly, giving up part of its earlier gains as traders reassessed interest rate outlook.

The data strengthened market expectations that Federal Reserve policymakers will opt for a pause rather than a rate cut this month. While price pressures have moderated from their peak, they remain above the Federal Reserve's long-term target, limiting the central bank's flexibility in the near term.

Underlying Price Pressures and Market Analysis

Market participants broadly interpreted the data as supportive of the view that inflation follows a gradual downward path, though not yet at levels justifying immediate policy easing. The December numbers helped calm fears that inflation would rebound sharply once earlier distortions unwound, instead suggesting continuation of the slow disinflationary trend.

Underlying pressures remain visible in several areas:

• Housing costs: Shelter-related expenses remain elevated with little improvement in affordability
• Trade-related effects: Limited tariff pass-through continues contributing to price stickiness
• Global factors: Rising government bond yields in major overseas markets, including Japan, add upward pressure on US long-term rates

Economic Outlook and Policy Expectations

Bond investors viewed the CPI data as mildly supportive, particularly at the short end of the yield curve, which shows greater sensitivity to Federal Reserve policy expectations. However, global dynamics remain an important variable influencing longer-term yields and investment decisions.

Economists remain divided on timing for potential rate cuts in 2026. While December's inflation report provided little justification for immediate moves, it reinforced expectations that easing could begin later in the year if downward price trends continue. Many analysts believe policymakers will seek further confirmation from upcoming data, particularly January inflation readings, before signaling any policy stance shifts.

The December CPI report provided reassurance that inflation is not reaccelerating while underscoring the Federal Reserve's cautious approach. The balance between moderating inflation and persistent price pressures leaves the central bank firmly in wait-and-watch mode, with markets increasingly focused on when rather than whether rate cuts will eventually arrive.