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Eleven central bank chiefs have signed a statement declaring “full solidarity” with Jay Powell, chair of the Federal Reserve, after the US launched a criminal investigation into Powell and a $2.5 billion project to renovate historic Fed buildings.
So what? This is about more than fancy curtains. The Federal Reserve is widely regarded as a bedrock of global financial stability and Donald Trump has it out for Powell. Undermining the bank’s independence risks
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eroding confidence in the dollar as the world’s reserve currency;
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pushing up interest rates on US sovereign debt, at record levels for peacetime; and
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encouraging politicians in other countries to use “lawfare” to influence monetary policy.
Shaky foundations. Powell has come out fighting, claiming in an unprecedented video message that the threat of criminal charges is a consequence of the central bank setting rates based on its best assessment of what will serve the public rather than Trump’s “preferences”.
While $700m in cost overruns is above average for the refurbishment of a federal building, lawyers are sceptical it would provide adequate grounds for Powell’s dismissal. He has defended the renovation as transparent. It is complicated by the removal of lead and asbestos, as well as the building’s location on what was once a swamp by the Potomac river.
What gives? Politicians always want the cost of borrowing to be low, especially when elections are near. That’s why most central banks around the world are independent, tasked with keeping prices stable and predictable. But Trump has several reasons to feud with the Fed.
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Affordability. An important part of Trump’s messaging is about reducing the cost of living, from making it easier to buy a house to capping credit card rates.
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Government debt. Trump wants to bring down the cost of servicing the US government’s growing debt. Powell is “costing our country a fortune,” he said last year.
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Power. Trump has publicly pushed the Department of Justice to go after his perceived opponents, although in Powell’s case he says he had no knowledge of it.
Is it personal? It appears so. Trump has been heaping insults on Powell for months, calling him a “numbskull” and a “stubborn mule” for not lowering interest rates. Until now, Powell has avoided taking the bait. Now he has tied his own future to the independence of the institution.
Beyond Powell. Trump has appointed his dovish adviser Stephen Miran to the board and tried to remove Lisa Cook, over claims of mortgage fraud. Cook’s lawyers say the allegations are baseless. There is an upcoming Supreme Court hearing on the attempt to oust her.
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Why now? Powell steps down as chair in May but has the right to stay on as a governor, and as a thorn in Trump’s side, until January 2028. Cook’s governorship term ends in 2038.
Backlash. The probe has met with significant domestic opposition, including from
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at least ten Republican lawmakers;
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multiple former US Treasury secretaries; and
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the past three chairs of the Fed who said “this is how monetary policy is made in emerging markets”.
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“US financial institutions are firmly opposed to this effort to intimidate the Fed,” said Richard Painter, who was a White House ethics lawyer under Bush. “This is very dangerous for our economy and an abuse of the justice department.” The only dogs yet to bark have been prominent business leaders – except JP Morgan’s Jamie Dimon – and the markets.
Sell America? The dollar was down and gold set a new record, but the S&P closed higher on Monday. The 10-year Treasury yield was pretty much unchanged in the immediate aftermath of the news, and the bond market barely moved. There are three possible explanations.
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Not biting. It can be unwise to sell off US assets on short-term news stories, especially when Trump often comes in hot before signalling a retreat.
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Inflation. The US number held steady at 2.7% in December. If it continues to come in below economists’ expectations, rate cuts are likely in any case.
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The intervention worked. By pushing back so hard, Powell made it clear that whoever succeeds him will be the president’s patsy.
What’s more… Trump has already started a beauty contest for the next Fed chair, which looks like it will be fought between two men called Kevin. The winner, whether Kevin Hassett, Kevin Warsh or a third candidate, will be announced in the coming days.
Photograph by Chip Somodevilla/Getty Images