By Howard Schneider
WASHINGTON, Jan 13 (Reuters) – After years of berating Federal Reserve Chair Jerome Powell, President Donald Trump may have hit a tripwire in launching a criminal probe of the 72-year-old former investment banker, with Republican lawmakers and former top policymakers rallying to Powell’s side and markets hinting at potential blowback if the president undermines the independence of the world’s most important central bank.
Central bank independence, the ability to set interest rates based on long-term outcomes not short-term political concerns, remains broadly accepted among conservative and liberal economists alike as important to sound economic management, and the administration’s steps against the Fed – with the attempted firing of one Fed governor and now the probe of Powell – may have unintentionally demonstrated why it matters.
Powell’s disclosure of a Department of Justice probe into his comments about a Fed building project made to the Senate Banking Committee last June quickly led to the unusual spectacle of three former Fed chairs likening the U.S. to a weak developing market, global officials calling out Trump for crossing a red line, and Republicans breaking from Trump with unusual intensity to defend Powell.
Powell, a lawyer and former Treasury Department official in the administration of Republican President George H.W. Bush, has cultivated bipartisan support in his 14 years at the Fed, working to strengthen the Fed’s standing among members of Congress, and as a governor trying to fill gaps in his understanding of economics with tutelage from Yellen in particular.
That relationship-building approach to his job may now be paying off.
“The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine” the Fed, a statement signed by former Fed chairs Janet Yellen, Ben Bernanke and Alan Greenspan 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. 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 three were joined by 10 other former top economic policymakers appointed by both Republican and Democratic presidents, including four former Treasury secretaries.
The statement came after Powell issued an extraordinary video statement on Sunday saying that Trump’s Justice Department had opened a criminal inquiry into comments he made to Congress last summer over ongoing building renovations at the Fed’s headquarters complex in Washington.
It marked the first time, after years of insults and pressure from Trump after he elevated Powell to the chair’s job in 2018, that Powell has so openly fought back – evidence of the stakes involved in the intensifying battle for control of the Fed, an institution whose particular legal structure and role in economic governance has made it more insulated from Trump than other ostensibly independent and technocratic agencies where the president has overhauled the top leadership.
To have maximum impact at the central bank, Trump would need an allied majority on the Fed’s seven-member Board of Governors to shape not just interest rates but a variety of regulatory and economic issues, even to the point of removing leaders of the 12 regional reserve banks who, while hired by local boards of directors, can be fired by a majority vote of the governors.
“To really shake things up Trump needs four governors who will do what he says,” said Yale School of Management professor William English, a former head of the Fed’s monetary policy division.
In that regard, time is not on Trump’s side, with several appointees of former President Joe Biden serving Fed terms that extend beyond Trump’s constitutional term limit.
He is already trying to fire Fed Governor Lisa Cook in a case to be heard by the U.S. Supreme Court next week. Many legal experts expect that effort to fail.
With Powell’s term as chair already expiring in May and Trump due to decide soon on a replacement, some analysts suggested the latest developments may be less about interest rates and more about pressuring Powell to leave the Fed altogether this spring.
Though Fed chairs by tradition resign from the board when their terms end, Powell could continue to serve as a governor until early 2028.
Though there is no certainty that Trump’s current appointees to the board would go along with any particular presidential recommendation, with longtime Fed staffer and current Governor Christopher Waller seen as a likely guardian of key principles, holding onto his board seat could be Powell’s way after 14 years at the Fed to further bolster the guardrails.
Until recently “I was adamant he would leave” the board when his term as chair expires in May, said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book about Fed history and politics. “Now he might stick around…This clearly prompted a more expansive response” from Powell than prior administration actions.
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci )
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