Powell Investigation Rocks Markets, Threatens Fed Independence

Global investors were sent reeling Monday after the conflict between US President Donald Trump and Federal Reserve Chair Jerome Powell escalated dramatically. A criminal investigation has reportedly been opened into Powell by the US attorney's office in Washington D.C., focusing on the central bank's headquarters renovation.

The market reaction was swift and negative. Ahead of the US open, S&P 500 and Nasdaq futures both fell by more than 0.6%. The VIX "fear gauge" saw its biggest jump since November, while gold, a classic hedge against turmoil, surged to $4,600 an ounce.

Fed's Independence Under Fire

With the once-sacred independence of the US central bank now in question, market participants are speculating the investigation is a political power play designed to pressure the Fed into cutting interest rates more aggressively. Powell's term is set to end in May 2026, and Trump, who will name his successor this month, is widely expected to choose a candidate who favors faster monetary easing.

This development amplifies existing concerns about political interference undermining the Fed's credibility. "We had already expected that the Fed would remain challenged by pressures from the White House and that in 2026 there would effectively be 'two Feds'," noted Edward Bell, Acting Chief Economist at Emirates NBD. He explained this refers to "the current Fed with Powell as chair and a post-May Fed when a new chair is appointed." Bell added that public disagreements among policymakers were already confusing the Fed's messaging, and this new threat will "further cloud the Fed's freedom of action."

Vijay Valecha, chief investment officer at Century Financial, warned of the potential consequences. "If this situation is not resolved soon, it could lead to more market volatility, a higher equity risk premium, and a further weakening of the greenback," he said. "We could also see greater inflows into safe-haven instruments such as precious metals and treasuries."

Global Ripple Effects Reach the Gulf

The turmoil is being watched closely by Gulf Cooperation Council (GCC) states. With most of their currencies pegged to the US dollar (except for the Kuwaiti Dinar), their monetary policy is closely tied to the Fed's decisions. When the Fed lowered rates last year, central banks across the region followed suit. Analysts expect regional banks will match the Fed's anticipated 75bps cut in 2026.

While lower rates are welcome, their impact may be limited. "Activity indicators for 2025 show that the economies of the UAE and Saudi Arabia had been performing well even with rates at higher levels so another move lower in rates will be welcome but unlikely to materially accelerate growth for either economy," Bell observed.

Still, short-term impacts are likely. Valecha anticipates "strong opposition to Trump's nomination of Powell's replacement, which could further increase market risk premiums."

Sector-Specific Impacts in the GCC

If uncertainty around Fed policy intensifies, several rate-sensitive sectors in the GCC could be affected, including banking, real estate, and high-dividend stocks.

According to Valecha, the prospect of continued monetary easing could have several effects:

• Dividend Stocks: Demand could rise for companies offering high dividend yields.

• Real Estate: Expectations of lower regional funding costs could boost demand for developers and REITs, especially as mortgage rates may also decline.

• Banking: While lower interest rates typically squeeze banks' net interest margins (NIMs), this could be offset by an increase in lending activity driven by the region's strong economic fundamentals.

A Weaker Dollar: A Double-Edged Sword

A weaker US dollar, which would also mean weaker GCC currencies, presents both opportunities and challenges for the region's economies.

"Imported goods become more expensive but non-oil exports, and in particular services exports, become relatively more competitive," Bell explained. He added that a significant portion of the region's imports come from markets like India and Turkey, whose currencies depreciated against the dollar in 2025, which could help offset rising costs from other trade partners.

Investor Playbook for Rising Volatility

Analysts are advising GCC investors to brace for heightened volatility across asset classes. "If markets start pricing in more political influence over the central bank's decision-making, then it could cause wild swings in global yields," Valecha said. He noted that while short-term yields might fall on rate-cut expectations, long-term yields could rise, leading to a steeper yield curve.

To manage this risk, Valecha recommends portfolio diversification. "Exposure to high-risk momentum plays or cyclical stocks should be balanced by including high-quality, stable defensive components," he advised. He also suggested maintaining a "liquidity buffer to take advantage of any corrective dips through dollar-cost averaging."

Despite the potential for short-term disruption, the long-term outlook for the region's capital markets remains positive. Valecha concluded that while policy uncertainty might cause a "temporary decline in foreign investor inflows," the strong long-term fundamentals of the GCC are likely to support the broader market uptrend.

Bell added that while elevated long-term US rates will keep upward pressure on regional borrowing costs, the "strong credit profile in economies like the UAE and Saudi Arabia and strong investor demand for regional issuances will help to keep spreads contained."