Jerome Powell, chairman of the US Federal Reserve.
Federal prosecutors have opened a criminal investigation of Federal Reserve Chair Jerome Powell over his June testimony before Congress about the central bank’s $2.5 billion renovation of its headquarters in Washington, DC,
The stunning action against the independent Federal Reserve was met with an equally extraordinary statement posted by Powell in a video Sunday night, in which he said the investigation was a direct result from his ongoing struggle with the administration over interest rates. Powell said it was a consequence of broader “threats and ongoing pressure” by the administration.
“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” Powell said in a statement late Sunday.
The probe sends a chilling message to Powell – and to whomever might next lead the Fed. President Donald Trump’s unyielding attacks on the Fed chair, whom the president has said he will not renominate, have hammered on the Fed’s traditional political independence. Trump has even said he should have a say in rate decisions.
But the criminal probe takes Trump’s fight with the Fed to a whole new level. It shows that whoever Trump selects to replace Powell at the conclusion of his term in May will face continuing pressure from the administration to lower interest rates.
Investors and economists across the globe prize the Fed’s independence. It guarantees policymakers will think of the long-term ramifications of setting monetary policy – and not short-term political whims – when steering the economy.
On Sunday, Powell directly linked the probe to the question of the Fed’s independence and its ability to set interest rates without political interference.
“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.”
Justice Department spokesperson Chad Gilmartin declined to comment on the investigation but said in a statement to CNN that the attorney general wants to “prioritize investigating any abuse of tax payer dollars.”
The White House referred CNN to the DOJ statement. In an interview with NBC News on Sunday, Trump denied knowledge of the investigation, saying, “I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings.”
A year-long pressure campaign
Trump and his allies have repeatedly slammed Powell over the past year for not cutting interest rates to the president’s liking. The Fed in the second half of last year lowered rates three times in row, though officials have recently said they’re unlikely to lower rates again for a while.
Trump’s pressure campaign has included a barrage of personal insults at Powell, evolving into threats to fire the Fed chair. However, Powell has maintained that Trump does not have the authority to fire him.
Later in the year Trump targeted Fed Governor Lisa Cook, appointed by then-President Joe Biden. The president and his allies accused Cook of mortgage fraud. Trump cited the allegations when he fired her in August, although Cook has not been charged criminally. The Supreme Court will hear oral arguments later this month on whether Trump can terminate Cook.
The Fed’s renovation has also been a source of ongoing controversy. Powell testified before Congress in June, saying the renovation was a collaboration with various agencies and that costs had changed over time.
Trump has threatened to sue Powell over the renovation. Last month, the president said he was considering “a suit against Powell for incompetence.”
Trump allies such as Federal Housing Finance Agency Director Bill Pulte and Office of Management and Budget Director Russ Vought have claimed the project was mismanaged. But the Fed says the upgrades to its decades-old buildings were necessary, including removing asbestos and upgrading electrical and ventilation systems.
The acrimony spilled out into public view in July, when Trump joined Powell on a tour of the project. Powell corrected Trump in front of reporters about the cost of the project, with the tension between the two men palpable.
Powell’s replacement
The federal probe comes as Trump prepares to announce his pick for Powell’s replacement once his term ends in May. The decision will cap a months-long search process for arguably the most influential role in the global economy.
Trump has hinted that the next Fed chair might be National Economic Council Director Kevin Hassett, though he has also recently interviewed Kevin Warsh, a former Fed governor, and is expected to interview BlackRock Global Fixed Income Chief Investment Officer Rick Rieder.
Trump has said he will announce his pick “early” this year.
After the federal probe became public late Sunday, Republican Sen. Thom Tillis of North Carolina said in a post on X that he will “oppose the confirmation of any nominee for the Fed—including the upcoming Fed Chair vacancy—until this legal matter is fully resolved.” Tillis is not seeking re-election.
Democratic Sen. Elizabeth Warren of Massachusetts echoed that in a statement Sunday: “The Senate should not move forward with any Trump nominee for the Fed, including Fed Chair.”
Investors and analysts also fretted about the probe and what it could mean for the world’s largest economy.
“We are stunned by this deeply disturbing development which came out of the blue after a period in which tensions between Trump and the Fed seemed to be contained,” wrote Krishna Guha, vice chairman at Evercore ISI, in a note.
“At the time of writing we are still looking to get more information and context, but on the face of it, it looks as if the administration and the central bank are now in open war…”
