Jerome Powell, chair of the Federal Reserve, announced that the U.S. Department of Justice has issued subpoenas against the U.S. central bank. This effort has specific relevance to a possible criminal indictment related to his testimony before a Senate Appropriations subcommittee. The joint investigation focused specifically on Powell’s claims that he spent so much on renovating Federal Reserve office buildings. This is a serious threat to the institution’s independence.
Powell’s announcement was made during an unplanned video announcement, a format that choice served to further highlight the seriousness of the time. He referred to the investigation as “unprecedented.” He continued, warning that such a move would greatly undermine the Federal Reserve’s independence from political influence. The investigation timing also coincides with increasing pressure over federal interest rate policies. This issue — the Powell vs. Trump –polemic performance has ignited an issue that should not be contentious in a democratic republic.
Three former chairs of the Federal Reserve—Janet Yellen, Ben Bernanke, and Alan Greenspan—along with other economic policy leaders, condemned the investigation. Instead, they say it reflects an insidious danger to the autonomy of the Federal Reserve. Their prophecy came true only one day after Powell announced the subpoenas and the risk of indictment.
“The Federal Reserve’s independence and the public’s perception of that independence are critical for economic performance.” – Jerome Powell and others
This inquiry opens after months of withering public criticism—including allegations of corruption and treason—by Donald Trump. He constantly attacked Powell personally, launching attacks on social media and through his statements to the press. Former President Trump repeatedly called on Powell to lower interest rates. He sought to reduce costs on American consumers and government borrowing. He repeatedly advocated for firing Powell. Even the possibility of such a move would send shockwaves through financial markets and open the door for a messy legal battle.
The former Fed chairs, including Janet Yellen who’s now Treasury Secretary, defended Powell. They noted that such legal threats against central bank officials have never been seen in American history. They contend that these kinds of moves would undermine the institution’s independence and hence its credibility, which is its ultimate tool to implement effective monetary policy.
“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.” – Jerome Powell and others
The inquiry is a result of Powell’s testimony about spending on renovations to Federal Reserve offices. Though little is known about the investigation so far, it appears prosecutors are focused on whether Powell lied to Congress regarding these improvements. The request has sent shockwaves through the public by hinting at a greater political interference in monetary policy that would undermine the long-term economic health and stability.
Here’s what one former Fed chair and ten other leading economic policy lights had to say about their alarming news. They cautioned that this investigation would damage the Federal Reserve’s operational independence. They drove home the point that essential independence and reputation are in upholding sound economic governance.
“has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.” – Jerome Powell and others
As public scrutiny mounts, Powell is left to tread a treacherous path between outside influence and ongoing hardened inquiry from within. The effects of this investigation could go deeper than his time as chair, setting a precedent that shapes perceptions of Federal Reserve independence for decades to come.