FXS Fed Sentiment Index remains in hawkish region as Fed independence comes under threat

• FXStreet Fed Sentiment Index stays in hawkish territory near 120.
• The Fed's blackout period will start on April 26.
• US President Donald Trump's criticism of the Fed's monetary policy grows loud.

The Federal Reserve (Fed) will enter the blackout period on April 26 before holding a two-day meeting on May 6-7. Markets widely expect the Fed to hold its policy rate unchanged, with the CME FedWatch Tool's probability of a 25 basis points (bps) at the May meeting holding around 10%. Meanwhile, FXStreet (FXS) Fed Sentiment Index stays near 120, pointing to a hawkish policy stance.

While speaking before the Economic Club of Chicago earlier in the month, Fed Chairman Jerome Powell repeated that they are well-positioned to wait for greater clarity before considering any changes to the policy stance. Commenting on United States (US) President Donald Trump's new trade regime, "inflationary effects of tariffs could be more persistent, depends ultimately on inflation expectations," Powell noted.

In the meantime, St. Louis Fed President Alberto Musalem stated that they would have to prioritize fighting inflation if inflation expectations were to become unanchored because of tariffs. On a similar note, "at the Fed, our job is to keep inflation under control so that rate isn't even higher," Minneapolis Fed President Neel Kashkari said.

Is the Fed independence under threat?

Despite Fed policymakers' overall hawkish tone, as reflected by the FXS Fed Sentiment Index, and market pricing of a strong probability of a policy hold in May, the US Dollar (USD) has been weakening against its major rivals. The USD Index, which gauges the USD's valuation against a basket of six major currencies, is down about 6% in April after losing more than 3% in March. Growing fears over an economic downturn in the US, as a result of the Trump administration's aggressive tariffs, seems to be the primary driver behind the USD selloff.

Lately, concerns over the Fed losing its independence have been putting additional weight on the USD's shoulders.

In a social media post published just before the European Central Bank's (ECB) monetary policy announcements on April 17, Trump accused Fed Chairman Powell of being "too late and wrong."

"The ECB is expected to cut interest rates for the 7th time, and yet, "too Late" Jerome Powell of the Fed, who is always too late and wrong, yesterday issued a report which was another, and typical, complete mess!," Trump said. While speaking to reporters a day later, White House economic adviser Kevin Hassett said President Trump and his team were continuing to study if firing Fed Chairman Powell was an option in a way that it wasn't before. In turn, the USD started the week under strong selling pressure, with the USD Index slumping to its weakest level in about three years near 98.00.

Assessing the market reaction to this development, "investors seem less than happy with the idea of a politicized Fed--the US dollar and long-dated government bonds have weakened," noted UBS' economist Paul Donovan. "There are checks on the president's authority. Fed governors need to be confirmed by the Senate. The FOMC chair does not have to be the Fed chair. However, some of these checks depend on rule of law."