Markets Brief: Fed Independence at Risk, Updates on Inflation, Tariffs, Earnings, and More

Sunday brought news that the Trump administration, through the Justice Department, was investigating Federal Reserve Chair Jerome Powell over testimony surrounding renovations of the Fed’s headquarters in Washington, D.C.

In an extremely unusual development, Powell released a statement and a video explicitly condemning the move by the administration as a pretext for forcing the Fed to lower interest rates.

“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,” Powell said. “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation,” Powell said.

The move by the Trump administration comes as markets are awaiting word on who the president will nominate to be the next Fed chair. Even before Sunday’s events there were widespread questions about how independent President Donald Trump’s nominee will be. Powell’s term as chair ends May 15.

The initial overnight reaction in global markets was to push stock futures lower. But beyond any short-term response, the critical question will be the verdict among investors on the growing risks to the Fed independence, what that would mean for the inflation outlook, and ultimately the credibility of the US central bank.

What to Expect from the December CPI Report

The new year is kicking into high gear. Last Friday saw the release of the December employment report, which confirmed that the jobs market closed 2025 on a soggy note. While the report did little to shift the immediate outlook for Federal Reserve policy—no change in interest rates is expected this month—Tuesday’s Consumer Price Index report could be more important in shaping the long-term outlook.

A big question is whether the inflation data will be clean enough to draw any conclusions from. The November report showed inflation that unexpectedly cooled, but the federal government shutdown is believed to have distorted the data.

The hope is that Tuesday’s data for December will provide a somewhat clearer picture of inflation trends. Economists aren’t sure if that will be the case. Broadly, forecasts call for an uptick in inflation from the shutdown-affected November readings, thanks largely to the lingering impact of Trump’s tariffs and the reversals of shutdown impacts.

A Supreme Verdict on Tariffs?

Wednesday could bring a critical decision from the Supreme Court on the legality of Trump’s tariffs under the International Emergency Economic Powers Act. (The court doesn’t say whether any rulings are forthcoming, just that there will be news.)

Press reports suggest that the justices seem skeptical of the administration’s use of emergency powers to impose tariffs. But should the court rule against Trump, it wouldn’t mean tariffs would go back to their pre-2025 levels, as we explain in “Watch These 6 Signals for Clues on Where Markets Will Go In 2026.”

Mortgage Math and Housing Affordability

Mortgage-backed securities are also now on the radar. While most mainstream investors don’t follow the goings-on in the MBS market, it’s a critical part of mortgage rates and home-buying. Last week, President Trump announced on social media that he was instructing “representatives”— expected to be the government-sponsored agencies Fannie Mae and Freddie Mac—to buy $200 billion worth of mortgage-backed bonds.

The idea is that this would lower mortgage rates and make buying a home more affordable. Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, notes that the announcement appeared to have an impact, with mortgage rates falling in the past week.

The market reaction seems to be “as intended,” as mortgage rates declined to the lowest level in nearly three years, with the average rate dropping by 0.22% to 5.99%, per CNBC. Additionally, homebuilder stocks rallied, suggesting investors believe lower rates could spur additional new construction and help homebuilders and other sellers clear out existing inventory.

But Pappalardo adds a caveat:

Often, when mortgage rates fall, housing prices increase because of decreased interest expenses on new purchases, which allows buyers to pay a higher purchase price than they could previously afford. Increasing home prices could offset any potential interest savings for homebuyers. Most homebuyers think about affordability in terms of the monthly payment they can handle within their budget and do not focus on the breakdown between principal and interest. If cost savings from a lower interest rate are offset by a higher purchase price, affordability has not improved.

Then there’s the question of whether Trump’s plan will have a meaningful impact beyond the knee-jerk market reaction. John Briggs, head of US rates strategy at Natixis, has this to say:

Our initial reaction is that while this is potentially impactful, we approach the announcement with some caution before assuming any tweet will immediately become policy that the market should fully adjust pricing to.

As we wait for further information, we also caution that while $200 billion is a big number, the Agency MBS market is more than $9 trillion in size. $200 billion is about 2% of that. Also, it is not clear that the agencies actually have $200 billion in cash to immediately spend. So on this basis, we view this as impactful but not a game-changer.

Q4 Earnings Season Kicks Off

The other big event this coming week is the kickoff of the fourth-quarter earnings season. First up are the big banks, with JP Morgan JPM reporting on Tuesday and Wells Fargo WFC, Bank of America BAC, and Citigroup C on Wednesday.

Sean Dunlop, a director of equity research at Morningstar who follows banks, offers his take on their earnings outlook:

Overall, I think it’s fair to expect really strong momentum in investment banking from the fourth quarter; we’ve already seen that with Jefferies. Asset-based fee income lines should also be strong. Net interest income looks to be a bit of a headwind, with 3%-4% balance sheet growth largely offset by projections for interest rate cuts (most banks are asset-sensitive), resulting in sluggish nominal interest income growth projected for 2026.

Against that backdrop, banks with larger fee-generating businesses will perform relatively better than those that depend more on interest income revenue, although a lot of this is priced in. (Money center banks, which are stronger on this count, trade at significant premiums to regional banks, which are proportionately weaker.)

Beyond the Banks—Watching AI Capital Expenditures

Here’s what David Sekera, Morningstar’s chief US market strategist, will be watching as the earnings parade really starts to move in coming weeks:

Considering the economy appeared to be running at a better-than-expected growth rate during the fourth quarter, I’d expect most companies will be able to easily meet and beat their guidance. With the economy, supported by the AI buildout boom, providing strong momentum going into 2026, I suspect first-quarter guidance will be at least as good as the market expects, if not better.

The main focus will be capital expenditure guidance at the main hyperscalers (Microsoft, Alphabet, Meta, Amazon, Oracle, et al)—specifically, how much they will spend on the AI arms race. Investors will be looking for increases in spending from 2025. So the question is: Will these increases be enough to satisfy the markets?

While a number of AI stocks trade below our fair value estimates, there are also a number that are overvalued and overextended. The base case for AI stock valuations (ours included) requires AI spending to continue growing at a healthy rate. Disappointment could send these stocks reeling. But we could just as easily see further upside, as our long-term base case is more conservative than those of many AI market prognosticators, such as Nvidia CEO Jensen Huang.