Fed Week: Policy Takes a Backseat to Political Crisis & Shutdown Fears

WASHINGTON — The Federal Reserve is widely expected to leave its benchmark interest rate unchanged at 3.50%-3.75% this week, but monetary policy has become a secondary story. Markets are reeling from a convergence of political shocks in Washington that have sent the US Dollar Index (DXY) tumbling to fresh four-month lows near 96.20.

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The FOMC meeting convenes under an unprecedented cloud: reports indicate the Justice Department is conducting a criminal investigation into Chair Jerome Powell regarding testimony on building renovations—a move widely interpreted by markets as political pressure from the White House.

Adding to the institutional stress, the Supreme Court is hearing arguments regarding the President's authority to fire Fed Governor Lisa Cook. This assault on central bank independence is eroding the US exceptionalism trade that supported the dollar for much of 2025.

“The policy debate has retreated,” notes a strategist at Oxford Economics. “The focus is now on whether the Fed can maintain its institutional firewall against the executive branch.”

Government Shutdown Imminent?

Compounding the Dollar's weakness is the looming fiscal cliff. Prediction markets now price the probability of a US government shutdown by month-end at approxmiately 80%. Negotiations have stalled following a shooting incident involving federal agents in Minneapolis, which has led Democrats to block funding for the Department of Homeland Security.

Market Implications

• The Dollar: The DXY is testing critical support at 96.20. A break below this level could trigger technical selling toward 94.00, especially if the FOMC statement is interpreted as “politically corseted.”
• Rate Path: Markets have pushed back expectations for the next rate cut to June. However, if the government halts operations, the lack of economic data (NFP, CPI) could force the Fed to fly blind, increasing volatility.
• Succession: President Trump is expected to announce a nominee for the next Fed Chair shortly, with BlackRock's Rick Rieder and former Governor Kevin Warsh among the frontrunners.

The “Pause” narrative is priced in; the risk premium for US institutional stability is not.