How the Powell Probe Could Disrupt Trump's Plans for the Federal Reserve

Federal Reserve Chair Jerome Powell is under a criminal investigation by the U.S. Department of Justice over his testimony on the $2.5 billion renovation of the Fed’s headquarters in Washington, D.C. The probe has intensified existing tensions between the Trump administration and the Fed. Powell has called the investigation an attack on the central bank's independence.

The DOJ inquiry is seen as a political move, reflecting repeated pressure from President Trump to influence interest rate decisions. Trump has criticized Powell for not lowering rates and has previously attempted to remove other Fed officials from their roles. The probe adds to concerns about the Fed's ability to set monetary policy based on economic data rather than political demands according to reports.

Powell has defended the central bank's autonomy and emphasized that monetary policy should not be subject to political interference. He warned that if the Fed were to lose its independence, it could lead to inflationary pressures and undermine long-term economic stability as he stated.

Why Did This Happen?

The investigation centers on Powell's congressional testimony regarding the Fed's building renovation project. The DOJ alleges potential perjury or misleading statements about the project's cost and scope. The U.S. attorney for Washington, D.C., is leading the probe, with some suggesting it is politically motivated.

The timing of the investigation aligns with Trump's ongoing criticisms of the Fed's interest rate decisions. Trump has previously attempted to fire Fed Governor Lisa Cook, a move blocked by the Supreme Court. He has also expressed frustration with the Fed's stance on inflation and has threatened legal action against the central bank.

How Did Markets React?

The news of the investigation caused immediate market jitters. U.S. Treasury yields rose as investors worried about the potential for reduced Fed independence. The 10-year Treasury yield climbed more than 2 basis points, while the 30-year bond yield increased over 3 basis points according to CNBC.

Stock futures also dropped after the announcement, reflecting investor concerns over the political risks facing the U.S. economy. The Cboe Volatility Index climbed as traders added protection to their positions as reported.

What Are Analysts Watching Next?

Market analysts and former officials have raised alarms about the probe. Former Fed Chair Janet Yellen called the investigation "extremely chilling" for the central bank's independence and warned of broader implications for U.S. governance according to CNBC.

Goldman Sachs chief economist Jan Hatzius noted that the probe has reinforced concerns about political interference in monetary policy. Despite these concerns, he believes Powell will continue to make decisions based on economic data as he stated.

The next key focus for investors is the upcoming inflation data, with a report due on Tuesday. Analysts are watching to see whether inflation remains stable or shows signs of rising. This could influence the Fed's next interest rate decision and its ability to act independently as reported.

The Fed's independence has long been a cornerstone of U.S. monetary policy. The current probe threatens to erode that independence, potentially leading to more politically driven monetary decisions. Such a shift could have lasting effects on the U.S. economy and global financial markets according to Bloomberg.

With Powell's term as Fed chair set to end in May, the Trump administration is reportedly considering loyalists as potential replacements. Names like Kevin Hassett, a top Trump economic adviser, are being discussed. The choice of Powell's successor will have significant implications for the direction of U.S. monetary policy as reported.

Investors and analysts are closely monitoring the investigation's outcome and the broader political dynamics at play. The coming months will likely test the resilience of the Fed's independence and the effectiveness of its monetary policy in a politically charged environment according to Bloomberg.