Fed and Powell Under Fire, but Some Argue Independence Was Always an Illusion

The U.S. Department of Justice has opened a criminal investigation into Federal Reserve Chair Jerome Powell’s June testimony to Congress regarding a $2.5 billion renovation of the Fed’s headquarters. Powell said the investigation is a politically motivated effort to pressure the central bank into lowering interest rates. The DOJ has served subpoenas to the Fed and threatened a criminal indictment.

The move has reignited concerns over the independence of the Federal Reserve, which has long been a cornerstone of U.S. monetary policy. Powell has stated that the probe is not about the renovation itself but about whether the Fed should set interest rates based on economic data or political pressure according to analysis.

Political tensions between the Trump administration and the Fed have escalated over the past year. Trump has repeatedly criticized Powell for not cutting interest rates more aggressively. Last year, Trump called Powell a “major loser” and demanded his resignation, though he later denied having such intentions as reported.

Why Did This Happen?

The DOJ investigation centers on Powell’s testimony about the renovation costs of the Fed’s headquarters. Powell has dismissed the allegations as a pretext, arguing the real issue is the independence of the central bank according to Bloomberg.

This is not the first time the Trump administration has sought to influence the Fed. In 2025, Trump attempted to remove Fed Governor Lisa Cook after accusing her of mortgage fraud, a move that was blocked by the Supreme Court. These actions raise concerns about the broader implications for central bank independence.

Economists and central bank officials argue that political pressure on the Fed could undermine confidence in its ability to manage inflation and employment goals. Morningstar economist Grant Slade warned that if the Fed is forced to lower rates under political influence, inflation expectations could become detached from the 2% target, leading to greater volatility as Reuters reported.

How Markets Responded

Markets reacted with caution to the news. The U.S. dollar fell against both the euro and the pound, while gold and silver prices surged. Precious metals are often seen as a hedge against inflation and political uncertainty according to MarketWatch.

Stocks also opened weaker on Monday, with the S&P 500 and Nasdaq both dipping slightly in early trading as Decrypt reported. Bond markets showed signs of increased volatility, with investors reassessing inflation and interest rate expectations according to CNBC.

Despite the initial reaction, some analysts believe the Fed’s policy direction is unlikely to change in the near term. Trevor Greetham of Royal London Asset Management noted that the Treasury market hasn’t moved significantly, partly because this isn’t the first escalation in the administration’s pressure on the Fed as Investing.com reported.

What Analysts Are Watching

Analysts are closely monitoring the potential impact on the Fed’s upcoming leadership transition. Powell’s tenure as chair ends in May, and Kevin Hassett, a Trump ally, is seen as a likely replacement according to analysis.

Wells Fargo economists said the investigation may complicate the next Fed Chair’s ability to build consensus among the FOMC members. They believe the central bank’s policy will remain on course in the near term but may become more challenging to implement as political pressure mounts according to Business Times.

Global central bank officials are also weighing in. A coordinated statement of support for Powell is being prepared by central bankers from around the world, signaling concern over the implications of U.S. political interference in monetary policy as Reuters reported.

The broader concern is that if the Fed’s independence is compromised, it could lead to higher inflation and greater economic instability. This could also affect global markets, as the U.S. dollar and Treasury yields play a critical role in international financial systems according to Bloomberg.