Yellen Condemns Trump-Era Fed Probe Amid Market Anxiety

Treasury Secretary Janet Yellen has criticized the Justice Department's investigation into Federal Reserve Chair Jerome Powell, calling it a dangerous precedent for central bank independence according to CNBC. She said financial markets should be more concerned about the situation, describing it as 'extremely chilling.'

Yellen, who served as Fed chair under President Barack Obama, emphasized that she believes Powell would not have lied to Congress about the renovation costs. She suggested the investigation is politically motivated.

The probe has raised concerns among investors, with Wall Street CEOs speaking out in support of the Fed's independence. JPMorgan's finance chief, Jeremy Barnum, warned that loss of Fed independence could harm economic stability.

Why Did This Happen?

The investigation centers on Powell's testimony regarding the $2.5 billion renovation of the Federal Reserve's headquarters in Washington, D.C. The project has been a point of contention for President Donald Trump, who has criticized the cost and called for the firing of Powell.

Trump has publicly pressured the Fed to cut interest rates, accusing it of delaying action that could ease economic conditions. The president has also criticized the Fed's handling of inflation and its impact on consumers.

How Did Markets React?

Financial markets reacted to the news with uncertainty, as investors feared potential political interference in monetary policy. The U.S. dollar weakened against major currencies, and gold prices surged to record highs.

Investors moved to safe-haven assets, with the Swiss franc and euro both appreciating. The S&P 500 fell as traders anticipated further policy instability.

Powell has defended his independence, stating that the investigation is a pretext to pressure the Fed into making politically motivated rate cuts. He emphasized the Fed's commitment to maintaining price stability and employment goals.

What Are Analysts Watching Next?

Analysts are watching for further developments in the investigation and its potential impact on the Fed's credibility. Jason Furman, an economist at Harvard, said the move is 'ham-handed and counterproductive'.

The upcoming confirmation of Powell's successor is also under scrutiny. Trump has suggested naming either Kevin Warsh or Kevin Hassett as the next Fed chair.

Political leaders in Congress have expressed concern over the administration's actions. Republican Senator Thom Tillis said he would oppose any of Trump's nominees for the Fed.

The investigation has sparked a broader debate about the balance of power between the executive branch and the Federal Reserve. Economists warn that political interference could lead to long-term economic instability.

Public sentiment is also shifting, with concerns growing over the potential erosion of the Fed's independence. This could affect investor confidence and market behavior in the coming months.