Analyst: Powell Lawsuit Could Exacerbate Fed Hawkish Stance

The U.S. Department of Justice has initiated a criminal investigation into Federal Reserve Chair Jerome Powell. The probe, which focuses on allegations of misleading Congress regarding renovations at the Fed's headquarters, has sparked concerns about the central bank's independence according to Decrypt. Powell has dismissed the investigation as a "pretext" for political pressure and an attempt to influence the Fed's policy decisions as reported by FXStreet.

Senator Thom Tillis (R-NC), a member of the Senate Banking Committee, has joined Powell in condemning the move. Tillis accused the Justice Department of undermining the Fed's credibility and vowed to block all Fed nominations until the matter is resolved according to FXStreet. The legal action has intensified speculation about Powell's future on the Fed's board and the potential for political interference in monetary policy as Seeking Alpha reports.

Analysts suggest the investigation could lead to a more hawkish stance from the Fed. Rogier Quaedvlieg, Senior Economist at ABN AMRO, stated that the situation may prompt the Federal Open Market Committee (FOMC) to adopt a more cautious approach to rate cuts in order to defend the institution from political pressure according to FXStreet. This shift could have lasting implications for the U.S. dollar and global financial markets.

Why Did This Happen?

The legal action stems from a $2.5 billion renovation project at the Fed's Washington, D.C. headquarters. Powell testified before Congress about the project in June 2024 and has since faced scrutiny from the Justice Department as Investing.com reports. The timing of the investigation has led some observers to question whether it is politically motivated. Trump supporters have framed the probe as a means of forcing Powell to align with the administration's economic preferences, particularly regarding interest rate policy according to The Wall Street Journal.

Mark Spindel, a Fed historian, noted that Trump has long sought to assert control over the central bank. The president has previously attempted to replace independent officials with loyalists and has criticized the Fed's decisions as being out of step with his economic agenda as The Wall Street Journal reports. The current probe appears to be part of a broader effort to reshape the Fed's governance structure and align its policies with Trump's vision for monetary policy.

How Did Markets React?

Financial markets have responded cautiously to the news. Haven assets like gold and silver saw early gains, with prices rising nearly 2% and 5%, respectively according to Decrypt. Bitcoin also edged higher by 1.7% to $92,000, reflecting investor demand for non-sovereign assets according to Decrypt. Analysts from quantitative yield protocol Axis and HashKey Group suggested that the perceived neutrality of Bitcoin is attracting institutional capital as a hedge against potential political interference in monetary policy according to Decrypt.

The U.S. dollar has remained under pressure in the broader context of 2026. A Reuters poll of currency strategists predicted a continued bearish outlook for the greenback, citing concerns about the Fed's independence and the likelihood of rate cuts according to Investing.com. Vincent Reinhart, chief economist at BNY Investments, highlighted the White House's push for more monetary easing and its potential impact on the dollar's value according to Investing.com.

What Are Analysts Watching Next?

Investors are closely monitoring the implications of the investigation for the Fed's upcoming policy decisions. The FOMC is expected to pause rate cuts in January, and prolonged uncertainty could delay further reductions according to FXStreet. If the legal proceedings intensify, the Fed may feel compelled to adopt a more hawkish stance to preserve its credibility and autonomy according to FXStreet.

Tim Sun, a senior researcher at HashKey Group, warned that a successful DOJ case could set a dangerous precedent. He argued that the Fed's independence is critical to the stability of the U.S. dollar system. If the central bank becomes subject to political pressure, it could lead to long-term changes in how investors perceive the dollar and sovereign assets according to Decrypt.

The legal process is expected to take months, with potential appeals reaching the Supreme Court. This timeline has increased the likelihood that Powell will remain on the Fed's board after his chairmanship ends in May as Seeking Alpha reports. Market participants are now assessing how this scenario might affect the composition of the FOMC and the central bank's overall policy direction.

In the broader economic landscape, the U.S. is expected to outperform other major economies in 2026, though in two distinct phases. A temporary slowdown in early 2026 may allow for rate cuts, while later government stimulus and trade policies could push inflation higher according to Seeking Alpha. The Fed's ability to navigate this shifting environment will depend heavily on its capacity to maintain independence from political pressures.