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20 Jan 2026 | 3 minutes to read
The independence of the US Central Bank, the Federal Reserve (Fed), came under renewed scrutiny last week, as tensions between the Trump administration and Fed Chairman Jerome Powell escalated. In a highly unusual move, Powell - who has previously avoided any public war of words with the White House - disclosed that the Department of Justice (DoJ) had launched a criminal probe over his prior testimony to a senate committee relating to renovation works at the Federal Reserve. Powell suggested that Fed building works were being used as a “pretext” and publicly noted that the situation directly threatened Central Bank independence. The Fed Chair stated that the “unprecedented” DoJ move would ultimately be 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”. President Trump, who denied any prior knowledge of the probe, has long agitated for the Fed to loosen monetary policy at a much quicker rate than has hitherto been the case - despite inflation running ahead of target.
The US 10-year treasury yield rose to its highest level in over four months on Friday, reaching 4.23% as investors reacted to the news flow. US economic data seems to continue to support the view that growth remains resilient enough to justify a higher-for-longer rate environment. But Powell's term is up in May, and his successor is likely to be a Trump-friendly candidate. Nonetheless, there now exists a greater risk that markets interpret accelerated rate cuts as politically influenced, disrupting the efficient transmission of monetary policy.
The latest US Consumer Price Index (CPI) print indicated that year-on-year inflation remained at 2.7% in December, unchanged from November and in line with expectations. Core inflation, which excludes volatile components like food and energy, rose by 2.6%, bettering expectations of a 2.7% rise. Food prices rose by 3.1%, adding to cost of living concerns for US voters. Futures markets are currently expecting there to be only two US rate cuts in 2026.
The UK economy rebounded in November, as GDP expanded by a better-than-expected +0.3% according to figures from the Office for National Statistics (ONS). This follows a -0.1% print for October and came in ahead of consensus forecasts of +0.1%. A significant uptick in output from auto production boosted manufacturing, as disruption caused by a cyber-attack centred on Jaguar Land Rover continued to unwind. The services sector also saw activity rebound as pre-Budget reticence gave way to increasing activity after the event – notably in professional services. Away from the shorter-term volatility, the longer-term trend for UK economic growth continues to be one of very gradual expansion. Monthly GDP figures are volatile and subject to revision – September’s print was revised up to +0.1% from a previous estimate of -0.1% for example – and rolling three-month data can provide a clearer picture of underlying trend growth. In the three months to November the economy grew by +0.1% quarter-on-quarter, and modest growth across the final quarter of 2025 is all but confirmed. With the Bank of England’s most recent growth forecast now equating to a seemingly overly pessimistic expectation of a flatlining economy in Q4, rationale for accelerating interest rate cuts in 2026 may fade.
The US corporate bond market started 2026 at full throttle. In the first trading week of the year, companies raised more than $95bn across 55 investment-grade deals – the highest weekly volume since the midst of the Covid-19 pandemic in May 2020, and the busiest start to a year ever, according to the London Stock Exchange Group. Issuers are moving fast to lock-in funding amid strong investor demand for investment grade dollar debt and attractive pricing. January is usually a busy month for corporate bond issuance, but many companies seem to be starting their funding programmes early. Getting ahead of further large bouts of bond issuance expected later in the year might be the motivation, with tech companies potentially needing further finance for AI infrastructure spend, and wider merger and acquisition activity anticipated. For the time being, investors apparently remain content with little additional compensation for the risk of lending to corporates over governments, with credit spreads increasingly tight. Crucially, many deals priced in-line with, or even tighter than, existing debt companies have in issue, thereby avoiding a usual new-issue premium (higher yield / lower price). High profile new issues included French telecoms group, Orange, which raised $6bn from a heavily oversubscribed order book, and US chipmaker Broadcom, which issued new debt of $4.5 billion. Europe’s investment-grade bond market was also active, with Enel and Veolia each raising €2bn.
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