Trump's Pressure on Fed 'Backfires,' Hawkish Candidate Warsh Overtakes Hassett

President Donald Trump's escalation in confrontations with the Federal Reserve has triggered a backlash from lawmakers and economists. A criminal investigation launched by the Department of Justice into Federal Reserve Chair Jerome Powell centers on allegations of false statements made during congressional testimony about the Fed's building renovation project. Powell, who was appointed by Trump in 2017, has called the investigation a politically motivated move to pressure the Fed into cutting interest rates.

Republican senators, including Thom Tillis and Lisa Murkowski, have condemned the administration's actions as an attempt to undermine the Fed's independence. They argue that the DOJ probe threatens the central bank's ability to make monetary decisions free from political influence. The bipartisan backlash has only intensified as former Fed chairs and economists have joined the critique, comparing the situation to practices in countries with weaker institutions.

The political standoff has raised concerns about the potential consequences for U.S. economic policy. Analysts warn that the administration's actions could erode the Fed's credibility in managing inflation and interest rates, which are critical for long-term economic stability. Kevin Warsh, a hawkish former Fed governor and potential replacement for Powell, has emerged as a preferred candidate among some investors, reflecting concerns over premature rate cuts.

Why Did This Happen?

The DOJ investigation appears to focus on statements made by Powell during a June congressional hearing about the $2.5 billion renovation project at the Fed's headquarters. Powell denied having a VIP dining room or other luxury amenities as part of the project, but the administration now claims he provided misleading information. The investigation follows months of public criticism from Trump, who has consistently demanded that the Fed lower interest rates more aggressively.

Powell has attributed the renovation's cost overruns to unforeseen expenses and emphasized that the long-term benefits of the project justify the investment. The administration, however, has framed the issue as a matter of fiscal responsibility, with Trump himself calling the renovation the "highest price of construction" per square foot in the history of the world.

How Did Markets React?

Financial markets reacted with caution following the announcement of the investigation. The S&P 500 and Dow Jones Industrial Average both fell in early trading, as investors adjusted to the uncertainty surrounding the Fed's independence. Analysts suggested that the selloff was partly driven by fears that the administration's pressure could lead to a shift in monetary policy that risks inflation.

Investors have also shifted toward traditional inflation hedges, including commodities and gold, as concerns about policy instability mount. The dollar index and U.S. Treasury yields also dipped, signaling a broader loss of confidence in the stability of U.S. monetary institutions.

What Are Analysts Watching Next?

Analysts are closely monitoring whether Powell will choose to remain on the Fed's Board of Governors after his term as chair ends in May 2026. Many believe he may stay to protect the central bank's independence from political pressure. The prospect of a new Fed chair, potentially Kevin Warsh, adds further uncertainty about the direction of monetary policy.

Political developments in the Senate could also determine the timeline for confirming a new Fed chair. Sen. Thom Tillis has indicated he will oppose any nominee until the DOJ investigation is resolved, potentially delaying the process. The administration, however, has not shown signs of backing down, with Trump emphasizing he values a more active presidential role in shaping monetary policy.

The broader implications of this political struggle extend beyond the U.S. economy. Global investors are increasingly questioning the reliability of U.S. institutions, with some suggesting that a loss of confidence in the Fed could have ripple effects on international markets. The administration's handling of the investigation and its outcome will likely shape the trajectory of U.S. economic policy in the coming months.