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Point of View · 01.12.26
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Probe of Fed’s Powell Could Backfire on Administration
Explore our perspective on the news that the U.S. Dept. of Justice is investigating the Federal Reserve and Chair Powell — and why it may backfire.
- Markets & Economy
- Federal Reserve
- Monetary Policy
- Central Banks
Key Points
What it is
The Department of Justice probe into Fed Chair Powell is unprecedented and may backfire on the administration.
Why it matters
The situation could unify the FOMC around Powell and increase the odds he remains at the Fed.
Where it’s going
We continue to expect two rate cuts this year, likely starting in the middle of the year.
The U.S. Department of Justice’s criminal probe into alleged misrepresentations by Federal Reserve Chair Jay Powell related to cost overruns on renovations of Fed historical buildings prompted a highly unusual response from Powell. His Sunday-evening video statement broke standard Fed practice of not commenting on the administration’s actions, and the video came directly from Powell rather than as a statement from the Fed. With Powell’s firm stance, we think the administration’s efforts to pressure the Fed to lower rates more drastically will backfire.
A somber and stern Powell spoke directly to the camera, as if addressing the nation. Even a printed press release by the Fed would be unusual, especially on a Sunday evening. These are typically reserved for moments of acute instability in the financial markets.
He said the “threat of criminal charges” is a consequence of the Fed not “following the preferences of the president” when setting interest rates. He added that he will be “standing firm in the face of threats” and that “monetary policy will not be directed by political pressure or intimidation.” These allegations are in addition to the criminal probe of Fed Governor Lisa Cook, regarding alleged mortgage fraud. The U.S. Supreme Court has scheduled a hearing on the Cook case for later this month.
‘Credibility of the Department of Justice in Question’
The renewed pressure on the Fed may backfire, having the opposite of its intended effect. Retiring Republican Senator Thom Tillis said, “If there were any remaining doubt whether advisers within the Trump administration are actively pushing to end the independence of the Federal Reserve, there should now be none. It is now the independence and credibility of the Department of Justice that are in question.” He also noted that he will oppose any nomination to the Fed, including for a new Fed chair, until “this legal matter is fully resolved.”
Tillis is a member of the Senate committee that oversees the Fed and his vote would be key for getting any Fed nomination to a full-Senate vote.
Pressure Could Further Unite FOMC Around Powell
The intensified political pressure on Powell may help ease some of the differences of opinion among (FOMC) policymakers about where to take short-term interest rates next and consolidate support around Powell. On the surface, the intensified pressure on Powell could also increase the odds that he chooses to stay as governor after his term as chair expires in May. His term as governor doesn’t expire until 2028.
Conceivably, subject to a vote by the FOMC, Powell could continue to serve as FOMC chair if no new Fed Board chair has been confirmed by the Senate by the time Powell’s term as Fed Board chair expires. Board Vice Chair Philip Jefferson would effectively become interim Fed Board Chair.
Tepid Market Reaction
The market response has been subdued, which we think indicates that the market also believes that the administration’s efforts will backfire, or, at a minimum, be ineffective. We continue to expect two rate cuts this year, likely starting in the middle of the year.
FOMC
The Federal Open Market Committee (FOMC) of the Federal Reserve holds eight regularly scheduled meetings a year to review economic and financial conditions and determine monetary policy. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy.
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