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.

Federal Reserve Chair Jerome Powell has disclosed that the US Justice Department has launched a criminal investigation into him over renovations to the Fed's historic office buildings, escalating tensions between the White House and the central bank to unprecedented levels. Powell claims the investigation represents political intimidation aimed at undermining the Fed's independence in setting monetary policy.

Criminal Investigation Details

According to a New York Times report, the US Attorney's Office for the District of Columbia has opened the criminal probe focusing on the renovation project and whether Powell lied to Congress about its scope. In a public statement released Sunday, Powell argued that he is being threatened because the Fed has set interest rates "based on our best assessment of what will serve the public, rather than following the preferences of the president."

Powell emphasized the broader implications of the investigation, stating: "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."

Bipartisan Congressional Opposition

The investigation has triggered strong bipartisan criticism from lawmakers who view it as a threat to Federal Reserve independence. North Carolina Republican Senator Thom Tillis, a member of the Senate Banking Committee, has taken a firm stance against the administration's actions.

Tillis stated in an official statement: "I will oppose the confirmation of any nominee for the Fed—including the upcoming Fed Chair vacancy—until this legal matter is fully resolved." He added that the move removes any doubt about efforts to end Federal Reserve independence.

Senator Elizabeth Warren characterized the investigation as part of Trump's objective to remove Powell and "complete his corrupt takeover of our central bank." She wrote on social media that Trump "is abusing the law like a wannabe dictator, so the Fed serves him and his billionaire friends."

Market Analyst Concerns

Financial experts have expressed alarm about the potential economic consequences of political pressure on the Federal Reserve. Jason Furman, former top economic adviser to President Obama and current Harvard University professor, praised Powell as a "true statesman" for resisting White House pressure.

Brian Jacobsen, chief economist at Annex Wealth Management, suggests Powell might choose to remain as a Federal Reserve governor after his term as Chair ends in May 2026, noting: "His term as Chair is up in May, but his term as a governor isn't up until January 2028. With the political pressure on the Fed, he may choose to stay on as a governor out of spite."

Economic Implications

Market strategists warn that aggressive tactics against Fed leadership could produce unintended economic consequences. Karl Schamotta, Chief Market Strategist at Corpay, cautioned that such pressure might trigger a surge in long-term bond yields, leading to higher borrowing costs throughout the US economy.

Schamotta noted that these tactics could backfire by driving up inflation expectations and weakening the dollar's status as a safe-haven asset. He described the revelations as "a dramatic escalation in the administration's effort to kick the legs out from under the Fed" that could unleash consequences contrary to stated presidential aims.

Political Context

The investigation represents an escalation in ongoing tensions between the administration and Federal Reserve leadership. A senior House Republican, speaking anonymously to POLITICO, criticized the criminal probe, stating the administration is "setting a standard they cannot achieve themselves and will haunt us all for a generation."

Senate Minority Leader Chuck Schumer characterized the investigation as typical bullying behavior, writing on social media: "Anyone who is independent and doesn't just fall in line behind Trump gets investigated. Jay Powell and the Fed aren't the reason Trump's economy and his poll numbers are in the toilet."