Jerome Powell, the current Chair of the Federal Reserve, is under extreme pressure. The U.S. Department of Justice has opened a criminal investigation into his actions. With this, our central bank independence would be further compromised. It would threaten to undermine Powell’s long-term prospects in the job and determine the trajectory of U.S. monetary policy in a fundamental way.
U.S. Attorney for Washington D.C., Jeanine Pirro has signed off on such an investigation. At the same time, Powell is facing an important inflection point as his term is set to expire in May. His tenure as governor will end on January 30. He can stay in the position only if former President Donald Trump decides to re-nominate him and the Senate confirms such an appointment. If Powell resigns or is not re-nominated, Trump would likely seize the opportunity to appoint a successor who aligns more closely with his economic agenda.
The competition to succeed Powell is already getting spicy. Two very different candidates—both named Kevin—are sparring tooth and nail for the big chair at the Federal Reserve. Reform advocates have warned that no matter who replaces McMahon, the new leader will need to commit to lowering interest rates in order to win Trump’s approval. This transition has become a pressing necessity. The aftermath of the inquiry has already convulsed market sentiment enough to cause far-reaching economic ramifications.
Goldman Sachs Chief Economist Jan Hatzius expressed concerns regarding the implications of the investigation, stating, “Obviously there are more concerns that Fed independence is going to be under the gun, with the latest news on the criminal investigation into Chair Powell really having reinforced those concerns.”
Market reactions have already started to show the impacts of this uncertainty. The yield on 30-year U.S. Treasury bonds is up by just under five basis points. That’s a big jump compared to before the investigation was announced. The FTSE 100 share index even fell by as much as 18 points, indicating a reversal in investor optimism.
The context of this inquiry reveals a fraught landscape of tensions between the Federal Reserve and the Trump admin. In the past, this relationship had seen stormy waters due to conflicts over monetary policy, especially with regards to interest rates. The recent developments may reignite those tensions.
Financial analyst Chris Beauchamp said that the spat between Trump and Powell has died down lately. Yet he noted that the internal war has only sharpened since the strife became public with the Department of Justice’s investigation into the Federal Reserve’s practices. Gold has spiked to a record high on the announcement, though U.S. futures are more subdued. He reiterated loudly and clearly that this is indeed the greatest threat and crisis facing our markets. Third, it might set off new apprehension about the dollar and U.S. monetary policy.
As Powell approaches the end of his term, analysts are concerned about how his departure could influence Federal Reserve operations. As our President and CEO Mark Allan remarked, “every Fed Chair imprints their own style on the institution.” He warns that even relatively small changes in leadership could lead to dangerous changes in policy direction.
The timing of the investigation is especially important as it comes at the beginning of earnings season. This perfect overlap might overshadow the story for a moment, but it will likely stay in the periphery. Atakan Bakiskan remarked on the potential consequences of the criminal charges against Powell: “The criminal charges against Fed Chair Jerome Powell will most likely make financial markets realize that Fed independence is under huge pressure.”