The tail risks in the US financial system have clearly increased. The Department of Justice's investigation into Powell not only did not make him retreat but also touched on two bottom lines: the independence of the Federal Reserve and judicial neutrality, angering the entire financial establishment. Former Fed Chairmen and former Treasury Secretaries have publicly expressed their views, essentially sending a clear signal to the market: targeting Powell is targeting the US dollar credit system. This explains why the market reaction has been so intense—it's not just a local shock but a triple decline in stocks, bonds, and the dollar, with gold soaring.

Trump claims to be "completely unaware" of the investigation and insists on distancing himself politically, but the market does not believe it. Without White House approval, the Department of Justice could not have launched such a large-scale operation. Looking at Trump’s style over the past year, this seems more like an internal mishandling rather than a carefully planned move. Rumors about Bessent falling out of favor are not unfounded—the financial system’s presence has significantly diminished in this incident, and after the investigation, the White House’s communication shifted from face-to-face meetings to phone coordination, indicating a reshuffling of internal power dynamics.

A more realistic scenario should be: someone within the administrative system attempts to show loyalty to Trump by "being tougher on Powell," but severely underestimates the countermeasures of the financial system. FHFA Director Pulte has both motivation and conditions to be sacrificed. Once the financial system openly opposes, Trump’s usual tactic is quick distancing and passing the buck to subordinates.

Ironically, Powell has actually raised his political standing through this incident. The previously expected graceful exit after his term ends has been disrupted; now, stepping down might confirm the reality that administrative power can intervene in the central bank at will, making him more likely to stay in office.

The most probable outcome: the investigation will be downgraded or handled quietly, the White House will issue a vague statement respecting the Fed’s independence, and internally within the administration, someone will be "dealt with," sending a signal to the market that risks are under control. Powell will not step down; the cost will be absorbed at the administrative level.

The most critical point for the market is that this is no longer just a disturbance but a re-pricing of the system’s stability. Even if the incident is suppressed, risk premiums will find it difficult to quickly revert to previous levels.