Markets, lawmakers scramble amid DOJ inquiry into Fed

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• Key Insight: Market watchers have expressed concern that the Trump administration’s threat of criminal charges against Fed Chair Jerome Powell can push mortgage interest rates up and devalue U.S. financial assets.
• Expert Quote: “At this point, Fed independence is on life support. It will be dead if the Senate confirms a Chair who is politically loyal to the President.” — Jeremy Kress, associate professor of business law at the University of Michigan.
• What’s at stake: The Trump administration has sought to influence the central bank’s monetary policy by publicly criticizing the Fed chair and attempting to remove Fed Gov. Lisa Cook from her post. Market watchers say the Justice Department inquiry reflects the president’s continued effort to assert control over the central bank.

The Trump administration’s threat of criminal charges against Federal Reserve Chair Jerome Powell sent shock waves across Washington and financial markets Monday, with watchers weighing the implications for the economy and the central bank’s independence.

But some observers note that the move could backfire on President Donald Trump’s housing affordability agenda and complicate the swift confirmation of the next Federal Reserve Governor, who is widely expected to ultimately be tapped as the next Fed Chair when Powell’s term expires in May.

Late Sunday, Powell released a recorded video statement saying the central bank had been served grand jury subpoenas from the Justice Department, “threatening a criminal indictment” over his testimony last June about ongoing renovations at Federal Reserve headquarters.

Market watchers called the threat “extreme” and “out of bounds,” describing it as another attempt by Trump to gain control of the central bank and warning that it could devalue U.S. financial assets.

Jeremy Kress, associate professor of business law at the University of Michigan, said this development is just another signal that the autonomy of the central bank is in question going forward.

“At this point, Fed independence is on life support,” Kress wrote in a statement Monday. “It will be dead if the Senate confirms a Chair who is politically loyal to the President.”

What we know
Grand jury subpoenas are generally confidential, which makes Powell’s disclosure of their having been served all the more noteworthy. But neither Powell nor the Fed have divulged the exact nature of the subpoenas or the target of the investigation. 

What is clear is that the Justice Department appears to have launched a grand jury investigation into cost overruns related to a multi-year renovation of the Federal Reserve’s Washington headquarters. Powell said the subpoena was “related to my testimony before the Senate Banking Committee last June,” referring to his regular oversight testimony in the House Financial Services Committee last year. Powell also testified in the Senate Banking Committee in July. 

The Fed’s renovation project has drawn criticism from President Trump and members of Congress before, with the President going so far as to stage a visit to the ongoing construction site last summer and confront Powell with cost overruns on live television.

Trump has made little secret of the basis of his animus towards Powell, which is that he would prefer the federal funds rate to be significantly lower than they are. 

Stephen Miran, the erstwhile chair of the White House Council of Economic Advisers and Trump’s only pick to the Fed board in his second term to date, has made countless public appearances pushing that lower-rate vision, but thus far his efforts have changed few minds on the Federal Open Market Committee. Miran dissented from the FOMC’s 25 basis point cuts in September, October and December, preferring a 50 basis point cut instead; the only other dissents from the FOMC during that period preferred no rate cut.  

Market reaction
Market watchers say a potential indictment of Fed Chair Jerome Powell could have significant economic repercussions, as investors may lose confidence that monetary policy is being guided by economic data rather than political pressure. Markets dipped in early morning trading before recovering later in the afternoon.

Some stakeholders warn that if those trends continue, U.S. financial assets could become devalued.

Derek Tang, CEO of Monetary Policy Analytics, thinks the loss of confidence by markets could be similar to what happens in emerging markets during times of political or institutional stress.

“U.S. dollar, bonds, and assets [at] large will suffer further erosion of confidence, potentially causing a lasting (if perhaps gradual) ‘triple down’ dynamic more typical of EMs,” Tang said in a written statement.

Mortgage industry stakeholders expressed concern over how this might impact mortgage interest rates.

Brian Hale, CEO of Mortgage Advisory Partners, said that the 10-year Treasury note, which is linked to mortgage rates, could worsen if investors perceive the Fed as losing independence in setting monetary policy.

“When that is the case, bond investors around the world look to buy other countries’ bonds or assets, which produces less demand for ours in the bond market,” Hale said. “When there’s not enough demand, and prices go down, interest rates go up.”

The Trump administration attempted to ease interest rates by directing Fannie Mae and Freddie Mac to buy $200 billion in mortgage-backed securities as a means to put liquidity into the market. Hale said a potential indictment against Powell runs “exactly contrary to that effort.” 

“[After Trump’s MBS announcement last week] rates came down to the lowest level in almost three years on Friday,” said Hale. “So if the administration’s desire is to lower mortgage rates to improve housing, this announcement over the weekend is exactly contrary to that effort, because this morning, the 10-year Treasury hit 4.20%.”

“It just seems like amateur hour,” Hale added.

A note from Jaret Seiberg, managing director at TD Cowen, echoed those concerns, saying that mortgage rates could rise if the market doubts the Fed’s ability to respond to inflation. 

“That could negatively offset Trump’s other efforts to bring down mortgage rates including the ordering of Fannie and Freddie to buy their own MBS,” Seiberg’s note Monday morning said. “This disconnect between short-term and long-term rates could grow even if the Fed does further cut rates.”

Lawmakers, former officials balk
Lawmakers from both parties expressed concern over the unfolding situation, with some saying they would refuse to confirm anyone to the Federal Reserve until it is resolved.

Republican Sen. Thom Tillis, R-N.C., a senior member of the Senate Banking Committee, wrote in a post on X that the revelations bring into question the credibility of the DOJ rather than the Fed, noting there should no longer be doubt that “advisers within the Trump administration are actively pushing to end the independence of the Federal Reserve.”

Tillis wrote that he will oppose confirming any nominee for the central bank “until this legal matter is fully resolved.”

Rep. Maxine Waters, D-Calif., dubbed the administration’s attempt to go after Powell as “its most reckless escalation yet,” and urged her colleagues to oppose any new nominee to the central bank.

“My colleagues in the Senate would be foolish to rubber stamp any more of Trump’s Fed nominees that will simply be the President’s ‘yes’ men, and I urge them to oppose any new nominee to the Federal Reserve until these baseless and politically motivated charges are dropped,” wrote Waters, the top Democrat on the House Financial Services Committee, in a statement.

Other prominent Republicans offered more muted criticism of the move. Sen. Kevin Cramer, R-N.D., who also sits on the Senate Banking Committee and has been a frequent critic of Powell’s, told reporters that he hopes “this criminal investigation can be put to rest quickly along with the remainder of Jerome Powell’s term,” adding that “we need to restore confidence in the Fed.” Sen. Lisa Murkowski, R-Alaska, said on X that the Justice Department’s efforts are “nothing more than an attempt at coercion” and that if the DOJ thinks Powell is worthy of investigation, then “Congress needs to investigate the Department of Justice.” 

More than a dozen Federal Reserve chairs, Treasury secretaries and leading economists also expressed concern, issuing a statement calling the Trump administration’s actions an attempt to undermine the central bank’s independence.

“The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine [Fed] independence,” the statement said. “This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly.” 

Signatories included former Fed chairs Ben Bernanke, Janet Yellen and Alan Greenspan, as well as former Treasury secretaries Timothy Geithner, Jacob Lew, Henry Paulson and Robert Rubin. Economists such as Glenn Hubbard, Kenneth Rogoff and Jared Bernstein also signed the statement.

The Fed’s precarious moment
The threat of a criminal indictment against Powell come ahead of several
events that could significantly shape the Federal Reserve’s future leadership and independence.

The Supreme Court is scheduled to hear oral arguments on Jan. 21 concerning whether Fed Gov. Lisa Cook can remain at the central bank while courts review the validity of President Donald Trump’s attempts to remove her.

According to Tang, the Powell probe can work in Cook’s favor at the Supreme Court.

“Her side might present [it] as evidence that her dismissal was also a pretextual ploy,” wrote Tang. “It might be harder for the Supreme Court to maintain any plausible deniability.”

Trump sought to oust Cook in August via a social media post, citing a criminal referral by Federal Housing Finance Agency Director Bill Pulte to the Justice Department regarding mortgage applications Cook submitted in 2021. Cook sued Trump and the Fed, winning a preliminary injunction that allows her to stay in her post while the case proceeds.

Tang also predicts that Powell will likely stay on as governor after his chair term ends in May, as the “latest frontal attack might be what tips the scales for him, given the urgency not to give Trump any more rope.”

Concurrently, Trump is expected to announce who he will nominate to serve as governor after Fed Gov. Stephen Miran’s term ends Jan. 31. His choice is widely expected to be tapped as the next Federal Reserve chair when Powell’s term expires later this year.

Ian Katz, managing director at Capital Alpha Partners, said that going forward it “will be very hard for anyone to think that Trump’s next Fed nominee will be truly independent.” 

“One could assume that whoever gets nominated will have agreed to try to push down interest rates, and may have agreed to speak with Trump regularly to get his input,” said Katz. “Regardless of whether the next nominee is actually independent or not, the perception will be that he or she isn’t.”