CROSSLIGHT WEEKLY PERSPECTIVES
JANUARY 18, 2026
KEY TAKEAWAYS
• Geopolitical wrangling and policy uncertainty obscure the underlying US strength
• Multilateral trade gives way to bilateral ties; diversify into non-USD assets
• Lack of Fed clarity fuels term premium; continue to avoid long-dated bonds
MARKET RECAP
US markets had a listless week. In fixed income, US Treasuries initially shrugged off news of the Justice Department’s subpoenas to the Fed but sold off into Friday’s close amid increased odds of Kevin Warsh as Fed chair. On the week, the ten-year Treasury yield rose 5 bps to a four-month high of 4.22%, while US stock indices pared roughly half a percent, weighed down by financials given the proposed 10% credit card cap. Foreign equities continued to outperform, led by Japan (+5.5%) and Korea (+5.6%), but the dollar stood firm against the majors. Volatility in precious metals persisted, with silver finishing the week up nearly 13%.
A flurry of trade-related matters dominated headlines. China posted a record $1.2 trillion trade surplus last year. Canada inked a trade deal with China that paves the way for the import of Chinese electric vehicles. The US reached an agreement with Taiwan to lower the tariff rate to 15% in exchange for $500 billion in tech investments. President Trump announced new tariffs of up to 25% on European countries that deployed troops to Greenland. The move followed a US-Denmark-Greenland meeting at the White House that failed to achieve a breakthrough. The SCOTUS ruling on Liberation Day tariffs was delayed for a second time.
LOOKING AHEAD THIS WEEK
As the World Economic Forum in Davos kicks off on January 19 under the theme “A Spirit of Dialogue,” President Trump’s presence will draw attention to the future of global cooperation. On Wednesday, the Supreme Court will hear oral arguments in Trump v. Cook, a case that could affect Fed independence. In Japan, Prime Minister Takaichi will reportedly call for a snap election to consolidate support for her fiscal expansion plans.
FOCUS THEME: Does Fed Independence Matter?
On January 10, the Justice Department subpoenaed the Fed amid a threatened indictment related to its headquarters renovation project. Despite President Trump’s denial of involvement, the move was seen as a response to the Fed’s year-long pushback against aggressive rate cuts and revived public discourse on central bank independence. In an unprecedented show of support for Fed Chair Jerome Powell, a group of sixteen foreign central bankers issued a statement highlighting central bank independence as “a cornerstone of price, financial and economic stability.”
The notion of central bank independence came to the forefront in the early 1980s, following the success of Fed Chair Paul Volcker in combating inflation through aggressive rate hikes, despite intense public and political opposition. Empirical evidence from around the world over the next two decades further strengthened the case for central bank independence in controlling prices, although the formal adoption of inflation targeting also helped. Statutory independence has been progressively granted to central banks in Norway (1985), New Zealand (1990), the UK (1997), Japan (1998), South Korea (1998), Sweden (1999), Switzerland (2004), and most recently Brazil (2021). Turning to the Fed, concerns over its independence are not without basis for three reasons.
First, market faith in the Fed’s ability to achieve its policy mandate is paramount, especially during a period of leadership transition. While the Fed exerts significant control over short-term interest rates, long-term rates, which matter more for the real economy, are determined by market forces. Without anchoring inflation expectations, a reduction in front-end money-market rates may not be reflected in a corresponding decline in long-term rates.
Second, the tug-of-war between monetary conservatism and fiscal largesse has intensified worldwide after a prolonged period of hibernation during global QE. In the US, the national debt-to-GDP ratio has risen sharply from 30% in the early 1980s to 120% today. Subordinating monetary policy to fiscal dominance is unlikely to be a lasting way to reduce debt service costs and could prove counterproductive in the absence of fiscal consolidation.
Third, the Fed’s institutional autonomy might not be as robust as widely believed. Founded by Congress under the Federal Reserve Act of 1913, Congress could, in theory, constrain the Fed’s powers and responsibilities, dissolve it by repealing the Act, or reabsorb it into the Treasury. The President selects the seven Fed Board members, including the Chair and Vice Chair, and has the authority to remove a Board member “for cause.”
From a strategic perspective, with interest rate volatility likely to rise amid uncertainty about the Fed’s leadership change in May, we would avoid long-end Treasury exposure. Based on the timeline of the last succession in February 2018, President Trump could announce his choice for the next Chair around mid-February. However, a Senate confirmation vote could be complicated by the ongoing Justice Department’s Fed investigation. Conversely, a decision by Chair Powell to serve out his term as a regular Governor on the Board through January 31, 2028, should bolster market confidence in policy continuity.
HEARD THROUGH THE GRAPEVINE
The economics of regime change — Political ruptures can reset a country’s economic trajectory, but only when households and firms believe the rules have changed for good and will endure. Serbia restored credibility; Tunisia layered new politics onto old economics; Libya collapsed entirely; and Venezuela today relies on borrowed credibility that sustains trade but not long-term investment. (The Economist)
Trump to hit Europe with 10% tariffs until Greenland deal is agreed — The White House plans to impose 10% tariffs on major European economies next month, rising to 25% by June, until they support a U.S. deal to acquire Greenland, escalating a geopolitical standoff. Protests and EU threats to stall a trade deal highlight how tariff pressure is reshaping transatlantic relations ahead of a Supreme Court ruling on presidential tariff powers. (FT)
Niall Ferguson: The Myth of Revolution in Iran — Ferguson argues Western observers misread Iran’s upheaval as revolutionary rather than counterrevolutionary, aimed at overturning the 1979 Islamic regime and restoring a more normal Iran. Successful counterrevolutions are rare and require elite defection, external support that doesn’t delegitimize the opposition, a restoration figure, and fractured security forces — conditions not yet present. (The Free Press)
AfCFTA accelerates implementation amid global trade uncertainty — The AfCFTA Business Forum in Marrakech concluded with a push to fast-track implementation amid rising global tariffs, prioritizing customs modernization, rules of origin, digital payments, industrial policy, and youth and SME participation. The shift from negotiation to execution aims to insulate against external volatility and positions Africa as a unified $3 trillion market attractive to global investors. (AfCFTA Secretariat)
The Fed Race Is Entering the Endgame — A criminal probe into Fed Chair Powell has hardened bipartisan support for Fed independence and pushed the administration to seek an off-ramp ahead of a Supreme Court ruling on Trump’s attempt to fire Governor Lisa Cook. With loyalty as the key criterion for the next chair, the shortlist has effectively narrowed to Kevin Warsh, with a decision expected around Trump’s Davos speech. (Barron’s)
Home Sales in December Jump 5.1%, Biggest Gain in Nearly 2 Years — Existing-home sales jumped 5.1% in December amid easing mortgage rates and slower price gains, but 2025 still ranked as one of the weakest housing markets in decades. Economists expect a gradual, affordability-driven recovery rather than a pronounced surge. (WSJ)
Soaring Electricity Costs Are Now a Hot Political Issue — Electricity bills are up 6.7% year-over-year and nearly 40% since 2020, making power costs a new election-year flashpoint as data centers, grid stress, and rate cases collide. Rising prices are drawing bipartisan scrutiny and could shape midterms, yet structural factors suggest no quick fix. (WSJ)
The Fight Over Making Data Centers Power Down to Avoid Blackouts — Rapid AI and cloud buildouts are straining U.S. grids, prompting proposals to curtail or disconnect data centers during peak demand to avoid blackouts. Texas and other regions are adopting conditional interconnection models that offer faster grid access for centers willing to curtail or self-supply power. (WSJ)
Thank you for reading CrossLight’s Weekly Perspectives. If you would like to discuss any of these themes, please reply to this note. This note is for informational purposes only and is not investment advice or a recommendation to buy or sell any security.