I have made it a point to refrain from commenting on the political headlines that swirl around the market. In my view, 90% of what happens in D.C. is noise, and the other 10% is usually priced in before the ink dries. But this week, the noise reached a deafening pitch with the Administration’s “criminal investigation” into Chairman Powell.
The headlines screamed constitutional crisis. The pundits predicted a collapse in institutional trust.
But the market? The market didn’t just yawn. It went comatose.
If you want the ultimate verdict on the Administration’s power—or lack thereof—look no further than the MOVE Index (the implied volatility of US Treasuries). In the face of an unprecedented executive assault on the central bank, bond volatility didn’t spike. It collapsed to a 4-year low.
MOVE Index as of 1/16/2025. Chart sourced from StockCharts.com
This is the market acting as judge and jury, and the verdict is unanimous: The Administration is bluffing.
The intent of the White House was clearly to intimidate, culminating in what could only be described as a “hostage video” style appearance by the Chairman. But instead of inducing panic, the stunt revealed weakness. As discussed in recent analysis of the President’s waning approval ratings, this Administration has significantly less political capital than it believes. They attempted to cross a bridge too far, assuming they could bully the Fed into submission.
The bond market called the bluff. By pricing in the lowest volatility we’ve seen in four years, investors are effectively saying: “You don’t have the power you think you do.”
If the market believed the Fed’s independence was truly at risk, if it believed rates would effectively be set by the Department of Justice, term premiums would have exploded and the curve would have steepened violently. Instead, we got historic stability.
The Law of Unintended Consequences
There is a final, ironic dimension to this week’s theater that the Administration may have overlooked. By launching a frontal assault on Chairman Powell, they may have just guaranteed he sticks around a lot longer than they planned.
While Powell’s term as Chairman expires in May, his term as a Governor on the Federal Reserve Board does not expire until January 2028. Even if replaced as Chair, he has every legal right to remain on the Board for another two years as a permanent voting member.
Historically, outgoing Chairs resign to give their successor clear air. But courtesies are for normal times. If the goal of this investigation was to force him out, the result may be the exact opposite. By politicizing his exit, the Administration has given him a powerful incentive to stay—not out of vanity, but to defend the institution’s independence. The White House risks creating its own nightmare: a former Chair sitting at the FOMC table for two more years, haunting the President long past the date he thought he’d be rid of him.
The Verdict
The lesson this week isn’t about legal jeopardy or home renovations. It’s about the limits of executive overreach. The Administration tried to fire a warning shot at the Fed, but the gun jammed.
In the end, the bond market remains the only poll that matters. And right now, it’s voting for institutions over individuals.
#FreeJayPowell
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