Fed probe rekindles diversification debate as investors weigh ‘Sell USA’ risks

The criminal investigation into Federal Reserve Chair Jerome Powell has renewed investor interest in diversifying portfolios away from the United States, even as markets have so far reacted calmly to what many view as an opening move rather than an immediate threat to financial stability, according to a report by Reuters.

The U.S. Department of Justice’s probe has revived discussion around the so-called “Sell USA” trade — a strategy involving reduced exposure to American equities, bonds and the dollar amid concerns over institutional and political risk. While a similar theme gained attention during last year’s tariff-driven volatility, it ultimately failed to translate into sustained capital outflows. Still, the latest episode has raised fresh questions about the long-term independence of the U.S. central bank.

Investors and policymakers have pushed back strongly against the investigation. Powell himself has sharply criticised the move, while former Fed chairs, senior lawmakers and global central bank leaders have publicly defended the Federal Reserve’s autonomy. Support has also come from top Wall Street executives, reinforcing the view that any direct interference with monetary policy would face significant resistance, Reuters reported.

Despite the controversy, the immediate market reaction has been muted. The dollar has weakened modestly, while U.S. Treasury yields have remained broadly stable since news of the probe emerged. This subdued response reflects a widespread belief that the investigation may have limited practical impact on policy outcomes, at least in the near term.

However, some investment strategists warn that the longer-term consequences could be more significant. According to Reuters, concerns are growing that even incremental erosion of confidence in the Fed’s independence could slowly prompt global investors to reassess the premium they assign to U.S. assets. Rather than triggering a sudden selloff, such shifts could unfold gradually, becoming visible only after risk perceptions accumulate over time.

The episode marks the latest escalation in President Donald Trump’s long-running criticism of Powell, whom he has repeatedly accused of being slow to cut interest rates. While financial markets appear to have absorbed the latest development without major disruption, some analysts believe the broader implications for institutional credibility should not be underestimated.
Investors have a recent reference point for how sensitive markets can be to shifting sentiment around U.S. assets. Last year’s tariff-related volatility briefly exposed how quickly capital flows could reverse after years of heavy inflows into American markets. Although the feared “sell-America” trade never fully materialised, Reuters notes that concerns surrounding the Federal Reserve could revive similar anxieties.At the same time, several structural factors continue to support U.S. asset allocation. Resilient economic growth, easing inflation pressures and strong investment momentum linked to artificial intelligence have helped underpin confidence in American equities and credit markets. These strengths have so far outweighed institutional concerns for many global investors.

Even so, unease over Federal Reserve autonomy adds to an already complex risk backdrop. Investors are simultaneously grappling with questions around U.S. fiscal sustainability and long-term debt dynamics, making institutional credibility a growing area of focus. According to Reuters, Fitch Ratings has reiterated that central bank independence remains a critical pillar supporting the United States’ AA+ sovereign credit rating.

Market participants also appear less reactive to policy shocks than in the past. Years of abrupt and sweeping policy announcements have conditioned investors to expect elevated uncertainty, dulling the immediate impact of headlines that might previously have sparked sharp moves. This reduced “shock factor” has helped explain the relatively measured response to the Fed investigation so far.

However, analysts caution that complacency carries its own risks. While markets may be willing to look through short-term noise, persistent pressure on key institutions could eventually demand a higher risk premium for U.S. assets. As Reuters highlights, the danger lies not in a single event, but in the cumulative effect of repeated challenges to institutional norms.

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For now, investors appear content to stay the course, balancing America’s economic strengths against rising political and institutional concerns. But the episode has clearly reintroduced diversification into the global investment conversation — not as an urgent call to exit U.S. markets, but as a reminder that even the world’s deepest and most liquid financial system is not immune to credibility risks.

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