Trump escalates pressure on Fed independence with Powell indictment threat

The Justice Department has threatened to seek a criminal indictment against Federal Reserve Chair Jerome Powell over testimony he gave this summer about the Fed’s building renovations, Powell said over the weekend, according to the Associated Press.

Powell’s remarks come as President Donald Trump has repeatedly sought greater control over the independent central bank, including by attacking Powell over the Fed’s failure to cut short-term interest rates and threatening to fire him, AP reported.

AP said Trump also accused Powell of mismanaging the Fed’s $2.5 billion building renovation project. In a sharp turn from his previous responses to Trump’s criticism, Powell described the threat of criminal charges as “pretexts” intended to undermine the Fed’s independence when it comes to setting interest rates.

The comments prompted early breaks with the president among some Republican lawmakers, AP reported. North Carolina Sen. Thom Tillis, who sits on the Banking Committee overseeing Fed nominations, said: “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,” AP reported.

AP also noted that Trump is already seeking to fire Federal Reserve Governor Lisa Cook over unproven mortgage fraud allegations made over the summer by Bill Pulte, a Trump appointee to the Federal Housing Administration.

Why the independence of the Fed is closely guarded, AP said, is that the central bank wields extensive power over the U.S. economy. By cutting the short-term interest rate it controls—typically when the economy falters—the Fed can make borrowing cheaper and encourage more spending; by raising rates to cool the economy and combat inflation, it can weaken economic activity and contribute to job losses.

Economists have long favored independent central banks because they can take unpopular steps to fight inflation, such as raising rates, which makes borrowing more expensive. AP said the value of Fed independence was cemented after the inflation spike of the 1970s and early 1980s, when former Fed chair Arthur Burns was widely blamed for succumbing to President Richard Nixon’s pressure to keep rates low heading into the 1972 election.

AP also pointed to Paul Volcker, who was appointed Fed chair in 1979 by President Jimmy Carter. AP said Volcker pushed the Fed’s short-term rate to nearly 20%, contributing to a recession and raising unemployment to nearly 11%, but that inflation later fell back into low single digits by the mid-1980s—an outcome AP said many economists view as a key example of independence’s importance.

Markets, AP said, may react quickly to any attempt to remove or pressure the Fed leadership. An effort to fire Powell would likely cause stock prices to fall and bond yields to spike higher, pushing up interest rates on government debt and raising borrowing costs for mortgages, auto loans and credit cards. AP said the interest rate on the 10-year Treasury is a benchmark for mortgage rates, and reported that all major U.S. markets slid at the opening bell on Monday while bond yields edged higher and the dollar declined.

AP said investors also watch the Fed because they generally see its independence as linked to better-managed inflation and more predictable policy. It also noted that while the Fed controls a short-term rate, longer-term borrowing costs for mortgages and other loans are influenced by financial markets, including expectations about inflation.

Independence, however, does not mean the Fed is unaccountable, AP said. Fed chairs are appointed by the president for four-year terms and confirmed by the Senate, and the president appoints other members of the Fed’s governing board with staggered terms that can run up to 14 years. AP also said Congress can set the Fed’s goals through legislation, including a 1977 “dual mandate” and a requirement that the chair testify before the House and Senate twice every year about the economy and interest-rate policy. AP said the law defines the Fed’s goal of stable prices as inflation at 2%.

On whether the president could fire Powell before his term ends, AP said the Supreme Court last year suggested that a president cannot remove the Fed chair just because he does not like policy choices, though removal “for cause”—typically interpreted as wrongdoing or negligence—may be possible. AP said the Trump administration has zeroed in on the building renovation in hopes it could serve as a “for cause” pretext, while noting that Powell would likely fight any removal effort and that the dispute could end up at the Supreme Court.

AP said Trump could replace Powell as Fed chair in May when Powell’s term expires, but that even replacing the chair does not guarantee policy will shift in the way Trump wants because 12 members of the committee vote on rate changes.