By Saqib Iqbal Ahmed, Suzanne McGee and Laura Matthews
NEW YORK, Jan 13 (Reuters) – The criminal investigation into the Fed chair has reinforced the case for diversifying holdings beyond the United States for some investors as they worry about the ongoing independence of the central bank, even though many saw the move against Jerome Powell as an opening shot that could end up being more bark than bite.
News of the Department of Justice’s criminal probe raised the specter of the Sell USA trade for investors — a strategy of reducing exposure to U.S. assets amid concerns about American economic, political, or institutional stability that was much discussed in the wake of last year’s tariffs, although it failed to gain traction.
Still, market reaction so far has been muted, as the action drew a sharp rebuke from Powell, who called it a “pretext” to influence interest rates, along with condemnation from former Fed chairs and lawmakers threatening to block Trump’s Fed nominees. Global central bank chiefs and top Wall Street CEOs have also lined up in support.
“We maintain a favorable view on international diversification, and this event reinforces that stance,” said Seth Meyer, global head of client portfolio management and portfolio manager at Janus Henderson.
Tom Graff, chief investment officer at Facet in Phoenix, Maryland, said that a weaker Fed would be worse for long-term bonds and the dollar.
“We added to non-U.S. equities in December and have been underweight longer-term bonds for the last year, so I feel we are well positioned here,” said Graff, although he did not see weight gathering behind a “Sell USA” type trade.
The move marked the latest escalation in President Donald Trump’s campaign against Powell, whom he has repeatedly criticized for failing to cut interest rates more quickly.
While global financial markets may have taken the latest developments in its stride – the dollar slipped modestly while U.S. Treasury yields were little changed since the announcement – some strategists said there could be a longer-term impact.
“It could be one of these things that happens very slowly, glacially for years and then suddenly very quickly,” said Colin Graham, head of multi-asset strategies at Robeco in London.
“At the moment they might not be changing, but as the cumulative risk grows, then you will see people deciding they want to go elsewhere,” Graham said.
THE SELL AMERICA WORRY
Investors saw a glimpse of how sharply markets could react to reduced appetite for U.S. assets during last year’s tariff-induced volatility, following years of robust inflows into American securities.
While the so-called ‘sell-America’ trade did not pan out to the extent some market participants had feared, some investors worry that the perceived attack on the Fed could revive that kind of a move.
“U.S. equities, and the dollar could come under pressure, as global investors demand a higher risk premium for U.S. assets,” Janus Henderson’s Meyer said.
While several factors continue to underpin the case for U.S. asset allocation, including resilient economic growth, declining inflation pressures, and the momentum of AI-related capital investments, questions about Federal Reserve autonomy persist as a source of investor unease.
Concerns about Fed independence “is going to give investors another excuse to diversify out of dollars,” said Thierry Wizman, global FX and rates strategist at Macquarie.
The concerns over Fed independence come as investors are already grappling with questions about U.S. fiscal credibility, with the episode adding to broader anxieties about American institutional stability that have periodically surfaced in credit markets.
Fitch Ratings said on Monday it views the Federal Reserve’s independence as a key supporting factor for its AA+ U.S. sovereign rating.
NUMB TO SHOCK
Market reaction was muted in part because investors have grown accustomed to sweeping and sharp changes in policy by the Trump administration, investors said.
In July last year, markets briefly tumbled amid reports that Trump would fire Powell, then rebounded after he said he was “highly unlikely” to do so. Over time, the market appears to have adapted to a higher degree of policy uncertainty, investors said.
“The shock factor that comes with the geopolitical and policy uncertainty is reducing,” Olumide Owolabi, senior portfolio manager at Neuberger Berman, said.
Still, that does not rule out markets reacting negatively in the future.
“The risk is that Trump could push too far on this,” said Charles Myers, chairman of advisory firm Signum Global Advisors.
(Reporting by Saqib Iqbal Ahmed, Suzanne McGee and Laura Matthews; Additional reporting by Lewis Krauskopf; editing by Megan Davies and Nick Zieminski)
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