Trump's fight with Fed Chair Jerome Powell may unleash one surprise economic consequence
Brian Sozzi ·
Executive Editor
Mon, January 12, 2026 at 1:51 PM EST
3 min read
In this article:
One potential outcome from the fresh battle between President Trump and Fed Chair Jerome Powell that won't sit well with Mr. Market or consumers is an outbreak of inflation.
"Looking at longer-term risk, inflation expectations could become unanchored," Northwestern Mutual Wealth Management chief portfolio manager of equities Matt Stucky told me on Yahoo Finance's Opening Bid.
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While inflation expectations have trended down, the undermining of Fed credibility can put a dent in the progress. For investors, "real assets [like gold] are your hedge there. So think commodities, think energy stocks as a way to hedge some of that inflation risk if it were to reverse and head the opposite direction," Stucky added.
Read more: Jobs, inflation, and the Fed: How they're all related
Powell revealed Sunday night that the Justice Department served the central bank with grand jury subpoenas, threatening a criminal indictment related to his testimony before the US Senate. At issue: reportedly, the central bank’s renovation job of its Washington headquarters and whether Powell misled Congress about the depth of the project.
In a video statement, Powell described the investigation as “unprecedented” and questioned the motivation for the move. The administration has been vocal in its desire for lower interest rates. Powell affirmed that he carried out his duties as Fed chair “without political fear or favor.”
Read more: How much control does the president have over the Fed and interest rates?
Most investors have never seen a heated battle between the Fed and the president play out in a public forum. While Trump has repeatedly attacked Powell since retaking the Oval Office, the latest news ratchets the situation up to a whole new level.
The bedrock of the Federal Reserve is its independence to make decisions on interest rates. Challenge that foundation forcefully, and it begins to crack… and then that could spread to the financial system.
One way this could appear is a rise in inflation expectations, as Stucky pointed out. The Fed has finally gotten inflation expectations under control, even if consumers aren't yet seeing it 100% in grocery stores and malls.
Year-ahead inflation expectations held steady in January at 4.2%, according to the latest University of Michigan consumer sentiment survey. This marked the lowest reading since January 2025.
Another crack could be a sell-off in stocks as investors adjust for higher risks.
"We think the trade may well gather pace, and will in any event have legs, with Fed independence risks a key theme throughout 2026," Evercore's economics team said in a note today.
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Whether one likes it or not, the bedrock of the US financial system is debt. It’s how the economy runs, and investors all around the world trust the US government to make good on its debt obligations.
If global investors lose trust in the US's ability to service debt, in part because of a less credible Federal Reserve, it will raise the cost of capital for the US and its many companies. That sets off a series of ugly dominoes one would rather not see pushed over.
Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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