The criminal probe into Jay Powell by US prosecutors has galvanised the Federal Reserve’s top leaders to resist President Donald Trump’s attacks and could push the chair to remain a governor until 2028, officials say.
Powell’s disclosure on Sunday that Trump’s Department of Justice had asked a federal grand jury to subpoena the Fed was seen by people close to the central bank as a sign that the president would go to extraordinary lengths to force policymakers to bow to his demands.
“People inside the Fed will view this development as really alarming and see it as a statement that Trump absolutely intends to gain control over monetary policy,” said Janet Yellen, a former Fed chair who is now at the Brookings Institution think-tank.
“Those that are worried about threats to independence may be more inclined to stay so that there are fewer seats available for Trump to gain control of the board,” Yellen added.
The investigation, which centres on Powell’s testimony to Congress about a $2.5bn renovation of the Fed’s headquarters, is considered by Fed insiders, along with some members of Trump’s own Republican Party, to be a grave threat to the independence of the world’s leading central bank.
It marks a serious escalation in a battle between the Fed and the White House that has seen Trump call Powell “an idiot” and “stubborn mule”. Trump is also seeking to sack governor Lisa Cook over allegations of mortgage fraud — which she denies.
Trump has denied any direct involvement in the DoJ probe, but he has repeatedly talked about firing Powell.
Powell, who had already hired top Washington litigators Williams & Connolly even before a grand jury issued subpoenas, is adamant that he will remain in place at least until his term as chair ends in May.
The aggressive nature of Trump’s pressure campaign against Powell could even backfire and persuade him to remain on the Fed’s board as a governor until his full term expires in January 2028.
“Why bother announcing it now with only a few short months remaining on Powell’s term as chair? The only answer I can divine is that it must be intended to try to intimidate Powell and his colleagues,” said David Wilcox, a former senior Fed official who is now at the Peterson Institute.
“The problem, from the president’s point of view, is that Powell is not a person who will be easily intimidated. That’s not his personal character.”
Wilcox, who also works for Bloomberg Economics, said that until Sunday evening his assumption was Powell would leave the Fed in May.
“My guess is that the weekend’s announcements of the criminal investigation shifts that calculus dramatically and that the probability of Powell leaving when he steps down as chair went to approximately zero,” he said. “He will see now the severity of the threat to the institution and likely feel that he has no alternative but to stay.”
Robert Tetlow, an economist who recently retired from the Fed, added: “It certainly might change the calculus on whether or not Powell leaves.”
Fed officials view the administration’s accusations that Powell misled Congress as without merit and believe the DoJ’s prosecutors will struggle to win a case against him.
While the Fed’s renovation is $700mn over budget, other building projects — including Trump’s rebuild of the East Wing of the White House — have also struggled to come in at cost.
People close to the Fed said there could be wide-ranging reactions to the probe from governors down to rank-and-file economists.
“Everyone will collectively be horrified. Just how that affects their personal choices I think will vary,” said Jon Faust, a former adviser to Powell who is now at Johns Hopkins University.
“It’s going to make people nervous. There’s going to be at least a segment of the staff that’ll say, ‘maybe I should be trying to go elsewhere’,” said Tetlow.
All living chairs of the Fed on Monday rebuked the DoJ probe, warning that the investigation was an “unprecedented attempt to use prosecutorial attacks to undermine [Fed] independence”.
Yellen, alongside Ben Bernanke, Alan Greenspan and a host of senior former economic officials from Republican and Democratic administrations, warned of the similarities to “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 controversy comes as the president is expected to announce his pick for the next central bank head later this month.
But Washington insiders think a job that already looked compromised by Trump’s repeated calls for ultra-low rates and moves to fire Cook has been entirely overshadowed following the DoJ probe.
Two Republican senators — Thom Tillis and Lisa Murkowski — have already said they would not back the president’s pick while the probe into Powell is ongoing. The number of objections is expected by some within the Fed to at least triple over the coming days.
“This makes the independence of chairman Powell’s successor even more important than it already was — every senator is going to have the opportunity to vote yes or no,” said Michael Strain, a former New York Fed economist who is now at the conservative American Enterprise Institute think-tank.
Yellen added that regardless of who the president picked, they would now struggle to convince markets that they were truly independent.
“You walk in and you will immediately be seen as someone who must surely have told Trump that you are going to do his bidding in order to have gotten the job,” said Yellen.
“Establishing your independence is going to be extremely difficult. And you’re massively outvoted by other members of the [Federal Open Market Committee].”