At a Glance
- The Justice Department has subpoenaed the Federal Reserve and threatened Fed Chair Jerome Powell with a criminal indictment over central-bank building renovations.
- The move follows President Trump’s repeated attacks on Powell for not cutting interest rates fast enough and accusations of mismanaging a $2.5 billion renovation project.
- Several Republican lawmakers, including Sen. Thom Tillis, broke ranks to warn the subpoena is an attempt to end Fed independence.
- Why it matters: Investors fear political interference could drive up bond yields, weaken the dollar, and rattle global markets.
The Justice Department has escalated its clash with the Federal Reserve by subpoenaing the central bank and threatening Fed Chair Jerome Powell with a criminal indictment, according to a weekend statement from Powell. He told reporters that the subpoena arrived Friday and centers on his testimony this summer regarding the Fed’s $2.5 billion headquarters renovation.
President Donald Trump has publicly berated Powell for months, demanding deeper interest-rate cuts to stimulate the economy and lower the federal government’s borrowing costs. The subpoena marks the administration’s most aggressive attempt yet to exert control over the traditionally independent central bank.
A rare Republican rebuke
North Carolina Sen. Thom Tillis, a member of the Senate Banking Committee, became one of the first GOP lawmakers to criticize the administration’s move.
“If there were any remaining doubt whether advisers within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none,” Tillis said.
The White House is simultaneously seeking to oust Fed Governor Lisa Cook over unproven mortgage-fraud allegations leveled by Bill Pulte, a Trump appointee to the Federal Housing Administration. Cook’s term runs until 2038, so forcing her resignation would open an early seat for a Trump loyalist.
Fed independence under fire
Economists have long argued that insulating the Fed from political pressure produces better inflation control and more predictable monetary policy. The lesson is rooted in the 1970s, when former Chair Arthur Burns acceded to President Richard Nixon’s wishes and kept rates low ahead of the 1972 election, allowing double-digit inflation to take hold.
Paul Volcker reversed course in 1979, pushing the Fed’s short-term rate to nearly 20% and triggering a severe recession that ultimately crushed inflation. The episode is widely cited as proof that an independent Fed can take painful but necessary steps politicians might avoid.
Markets reacted nervously Monday. Major U.S. stock indexes opened lower, the dollar slipped, and the yield on the 10-year Treasury-used to set mortgage rates-inched higher. Investors worry that perceived political meddling could send bond yields soaring, raising borrowing costs for mortgages, auto loans, and credit-card debt.
How Fed leaders are protected-and vulnerable
Fed chairs serve four-year terms but can be removed only “for cause,” a standard the Supreme Court last year suggested applies to heads of independent agencies. The administration’s focus on the building-renovation issue appears designed to supply that pretext.
If Trump attempts to fire Powell before the chair’s term ends in May, the case would likely land before the high court. Even then, policy could remain unchanged; 12 regional Fed presidents vote on rate decisions, diluting any single appointment’s impact.
Congress can also reshape the Fed’s mandate. A 1977 law requires the central bank to pursue both stable prices and maximum employment, and it obliges the chair to testify before lawmakers twice each year.
Global cautionary tale
Turkey offers a recent example of what can happen when politicians override central-bank autonomy. President Recep Tayyip Erdogan pressured Turkish rates lower in the early 2020s even as inflation spiked to 85%. After relenting in 2023, Turkey’s central bank hiked its policy rate to 50%, where it remains, to wrestle inflation back down.
Key takeaways
- The subpoena represents an unprecedented criminal threat against a sitting Fed chair.
- Investors fear the dispute will inject uncertainty into bond markets, pushing consumer rates higher.
- Trump will have a legal opportunity to replace Powell in May, but any premature removal attempt faces court challenges.
- History shows that compromising central-bank independence often fuels inflation and market volatility.
