Political pressure on Fed clouds rate path, nudging Canadian portfolios toward higher risk
A political fight over the US Federal Reserve’s independence is starting to show up where it matters for plans and retirees: the Canadian dollar, bond yields and portfolio risk.
According to Reuters, the loonie rose about 0.3 percent on Monday to 1.3875 per US dollar, or roughly 72.07 US cents, after recently hitting a five‑week low, as the US dollar weakened on rising worries about Federal Reserve independence.
Global News reported that the Canadian dollar was worth about 71.90 US cents on Jan. 9 and about 72.10 US cents by the afternoon of January 12, underscoring the shift.
The catalyst is legal and political pressure on Fed Chair Jerome Powell.
Reuters said the US Department of Justice threatened to indict Powell over comments to Congress about a building renovation project, which he called a “pretext” to gain more influence over interest rates.
Global News reported that Powell, in a video statement, linked the allegations to his 2025 testimony on renovations to US Federal Reserve office buildings and said he believes the case is a pretext for the Trump administration to have more control over monetary policy and interest rates.
Currency and rates specialists frame the loonie’s move as a US political story rather than a Canadian one.
“I think the Canadian dollar’s rebound has more to do with US political risk than anything happening domestically,” said Tony Valente, senior FX dealer at AscendantFX, in comments to Reuters.
He said headlines about a potential Trump administration criminal investigation into the Fed chair have “raised concerns about central bank independence, which has weighed on the USD,” and that the loonie is “really benefiting from USD weakness rather than a shift in Canadian fundamentals.”
Economists quoted by Global News stressed that this goes to the core of how central banks manage inflation and growth.
Institutions like the US Federal Reserve and the Bank of Canada are expected to set interest rates based on data and expert assessment, not partisan direction.
Derek Holt, vice‑president and head of Capital Markets Economics at Bank of Nova Scotia, said he would be “vastly more concerned about a scenario in which the administration of the day is calling the shots on monetary policy,” even if he has not always agreed with Powell’s past decisions.
That concern is already being priced in.
According to Global News, Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, said independence must remain “paramount” because inflation expectations “drive future inflation” and wages.
He described the current situation as “the starting of the sort of Fed independence risk premium that we’re going to be facing this year.”
Reuters reported that Karl Schamotta, chief market strategist at Corpay in Toronto, warned that aggressive legal threats against Fed officials could push inflation expectations higher, erode the US dollar’s safe‑haven role and trigger a sharp rise in long‑term bond yields, raising borrowing costs across the US economy.
Those yields matter directly for asset allocation.
Reuters said Canadian bond yields edged higher across the curve, with the 10‑year up 0.7 basis points to 3.400 percent, while Global News reported that US markets sold off at the open before recovering by midday after the DOJ news.
Craig Ellis, chief investment officer at Bellwether Investment Management, told Global News the initial reaction was negative but markets bounced back quickly, and he said this investigation “just sort of adds to that uncertainty.”
He advised investors to stay diversified rather than concentrate too much in any single stock, bond or commodity, and warned that if markets believe the Fed is becoming less independent and more influenced by politics, longer‑term bond yields could rise, “and that’s not what the US needs right now.”
Against that backdrop, Reuters reported that Canadian jobs growth slowed in December and that Prime Minister Mark Carney has vowed to diversify Canada’s exports away from the United States, with a visit to China set for this week.
