The US Justice Department’s threat to criminally indict Federal Reserve Chair Jerome Powell has triggered a fresh confrontation between the White House and the central bank, intensifying concerns over the Fed’s independence and the direction of US monetary policy.The subpoenas, served on Friday, relate to Powell’s June testimony on the $2.5 billion renovation of Federal Reserve buildings, including its Washington headquarters, AP reported. Powell has said the legal action is a pretext aimed at forcing the Fed to comply with President Donald Trump’s demand for sharp interest rate cuts.“I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment,” Powell said in a video statement on Sunday night. “Public service sometimes requires standing firm in the face of threats.”Markets reacted negatively on Monday, with US stocks falling after Powell disclosed the subpoenas.
Why Trump is pressuring the Fed
Trump has repeatedly criticised Powell over the past year for resisting aggressive rate cuts, arguing that inflation is no longer a threat and that lower rates are needed to support growth. Powell, however, has maintained that inflation remains elevated, partly due to the impact of Trump-era tariffs, and has favoured a cautious policy approach.The conflict reflects a deeper dispute over how much influence the White House should have over monetary policy. Powell’s current term as Fed chair ends in May, but he could remain on the Fed’s board until January 2028, a move that would prevent Trump from immediately filling another vacancy.Asked whether Powell planned to stay on as a Fed governor, Kevin Hassett, director of the White House National Economic Council and a potential candidate to succeed Powell, said he was unaware of Powell’s intentions.“I’ve not talked to Jay about that,” Hassett said.Trump had earlier signalled his intent to escalate the confrontation, telling reporters in late December that his administration would “probably” sue Powell over the renovation costs.“He’s just a very incompetent man,” Trump said. “But we’re going to probably bring a lawsuit against him.”
Economists warn of risks to Fed independence
The legal action has drawn sharp criticism from economists and former policymakers, including several who previously led the Federal Reserve.A bipartisan group of former Fed chairs and top economists said on Monday that the White House’s actions amounted to “an unprecedented attempt to use prosecutorial attacks to undermine” the central bank’s independence.“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,” the statement said. “It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.”The statement was signed by former Fed chairs Ben Bernanke, Janet Yellen and Alan Greenspan, along with former Treasury secretaries Henry Paulson and Robert Rubin.Republican Senator Kevin Cramer of North Dakota, a frequent Powell critic, also expressed discomfort with the criminal probe.He said he does not believe Powell is “a criminal” and added that he hopes “this criminal investigation can be put to rest quickly,” according to CNBC.Powell, who has largely avoided public confrontation since Trump began attacking him last year, said the subpoenas were intended to undermine the Fed’s ability to set policy independently and described them as a “pretext” to force interest rate cuts.The episode marks one of the most direct challenges to the Federal Reserve’s autonomy in modern US history, with implications for markets, borrowing costs and the broader economy, according to analysts.
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