President Donald Trump's administration has intensified its ongoing feud with Federal Reserve Chair Jerome Powell by initiating a criminal investigation targeting Powell. This development represents a stark departure from previous tactics, which mostly involved public criticism rather than legal action. The current probe raises concerns among economists, market participants, and former Federal Reserve officials about the potential repercussions for both monetary policy and market stability.
Trump has repeatedly expressed his desire for significant reductions in interest rates, a thriving stock market, and removal of Powell from his leadership position at the Fed. However, the strategy to pursue criminal charges against Powell may ultimately hinder these objectives. Experts suggest the investigation could delay interest rate cuts, increase volatility in financial markets, and even compel Powell to remain on the Federal Reserve Board beyond his scheduled term expiration in May.
Steve Fisher, a former president of the Dallas Federal Reserve Bank, condemned the administration’s approach as "lawfare at its worst," expressing disbelief that such a measure would be adopted. Fisher speculated that the investigation serves little purpose other than retribution, stating, "I find it hard to believe they would stoop to this level. This is a step too far." His comments reflect widespread unease over the administration’s tactics.
Historically, the Trump administration largely refrained from direct legal action against Powell, opting instead for verbal disparagement in public forums. The recent move to threaten criminal indictment marks a red line, crossing into an unprecedented realm of political interference with the Federal Reserve’s independence. Wall Street reacted to the news with caution. US stock indices and the dollar experienced modest retreats following the announcement, while precious metals markets surged sharply in contrast. Gold reached record prices above $4,600 per ounce, climbing approximately 3%, whereas silver rose nearly 8%, extending gains from its strongest yearly performance since 1979.
Economists criticized the investigation for threatening the Federal Reserve’s designed autonomy. Justin Wolfers, a professor of economics at the University of Michigan, called attempts to criminalize monetary policy decisions an "outrage," emphasizing that it constitutes poor economic management and poses risks to the rule of law and market confidence. Similarly, Tim Mahedy, CEO and chief economist of Access Macro and a former San Francisco Fed official, interpreted the legal action as a warning to current and future Fed policymakers against resisting President Trump’s push for lower rates.
Market indicators suggest skepticism regarding imminent rate cuts. The CME FedWatch Tool assigns just a 5% probability to a Federal Reserve interest rate cut at the forthcoming meeting in late January, reflecting little change from previous estimates and a decline from 17% a week prior. Alan Blinder, former vice chair of the Federal Reserve Board, described the investigation as "an outrageous act" that would be startling if undertaken by any other president, though he expressed confidence in Powell’s resilience against intimidation.
Observers of Federal Reserve deliberations warn that the administration’s aggressive stance may strengthen resistance among Federal Open Market Committee members wary of succumbing to political pressures. Mahedy articulated this dynamic, suggesting the president's actions inadvertently encourage a more hawkish posture to deflect accusations of political bias. The investigation also spurred a rare united front among former Fed chairs, bipartisan ex-Treasury secretaries, and past White House economists, who collectively condemned the probe as an unprecedented attack threatening the central bank’s independence and likened it to destabilizing practices observed in emerging market economies.
In response to the controversy, the White House has sought to distance President Trump from the Department of Justice’s investigation. Press Secretary Karoline Leavitt stated that Trump did not instruct the DOJ to open the inquiry, despite the president’s previous harsh public criticisms of Powell, labeling him with derogatory terms such as "dumb guy" and "absolute fool."
Ironically, the hostile actions aimed at removing Powell may result in his continued presence at the Federal Reserve longer than anticipated. Although Powell’s term as chair expires in May, his appointment as a governor on the Fed's board extends through January 2028, enabling him to remain influential. Powell has remained noncommittal about his future beyond his chairmanship, effectively obstructing the appointment of potential successors and maintaining a voice advocating for institutional independence. In December, Powell stated, "I’m focused on my remaining time as chair. I haven’t got anything new on that to tell you," when questioned about his plans.
Market perception appears to reflect increased likelihood of Powell's continued tenure following the investigation announcement. Prediction market Kalshi showed an 85% chance Powell would leave the Fed before August; this probability dropped to 55% after news of the criminal probe emerged, signaling investor expectation that Powell may hold his position irrespective of political pressure.
Douglas Holtz-Eakin, president of the American Action Forum, a center-right think tank, criticized the administration’s strategy as "really unwise and bone-headed," summarizing it as "really stupid." The political fallout appears to extend beyond market effects, potentially complicating Senate confirmation of any Trump nominee to replace Powell as chair. Leading candidates include former Fed Governor Kevin Warsh and White House economist Kevin Hassett, yet confirmation hinges on the Senate Banking Committee’s approval.
Republican Senator Thom Tillis, a committee member, promptly expressed opposition to any Fed nominee from the Trump administration until the investigation into Powell concludes, accusing the administration of attempting to undermine Fed independence through prosecutorial means. Alaska Senator Lisa Murkowski publicly supported Tillis’s stance, condemning the move as coercive. Should additional Senate Republicans align with their positions, the path for confirming Trump's preferred Fed chair may be obstructed, further extending Powell’s role within the Fed.