Fed Independence in Peril: Justice Department Probe Rattles Markets through 2026 Strategy

The independence of the Federal Reserve faces an unprecedented test following the US Department of Justice's announcement of a criminal investigation into Chair Jerome Powell. The probe, ostensibly concerning budget overruns on a headquarters renovation project, is viewed by market participants as a thinly veiled political maneuver by the administration to force a leadership change.

Rate Cut Bets Collapse

The chaos at the top of the Fed has forced a rapid repricing of the interest rate trajectory. Amidst the uncertainty, the market has effectively priced out immediate easing.

• January FOMC: Probability of a hold has spiked to 95%.
• March FOMC: Probability of a hold sits at 71.3%.
• 2026 Outlook: Total expected cuts for the year have compressed from nearly 80 basis points to just 51 basis points.

With Powell fighting for his political survival and the Fed's institutional integrity, the central bank is expected to freeze policy until credibility is restored.

Bitcoin Decouples as a Hedge

In a notable shift in correlation, Bitcoin (BTC) has diverged from traditional risk assets. While S&P 500 and Nasdaq futures shed roughly 0.7% on the news, Bitcoin climbed 0.7%, trading near $91,800.

Analysts suggest a narrative shift is underway: Bitcoin is being treated less as a tech beta and more as a hedge against institutional failure and the politicization of monetary policy. With the “Powell Put” now in question, capital is seeking refuge in non-sovereign assets.

VIX reaction: The “Fear Gauge” has ticked higher, reflecting growing demand for hedging against macro-political shocks that standard economic models cannot predict.