Trump DOJ threatens Powell with criminal charges in escalating battle over Fed independence

The Trump administration’s Justice Department threatened Federal Reserve Chair Jerome Powell with criminal indictment over testimony he gave about the central bank’s headquarters renovation, escalating a months-long campaign to exert greater control over the institution and its interest-rate decisions, the Associated Press reported.

Powell, in a departure from his previous responses to Trump administration pressure, called the criminal charge threat mere “pretexts” to undermine the Fed’s independence on rate policy.

The confrontation has renewed scrutiny of why central bank independence matters to financial markets and the broader economy, and what federal law actually allows a president to do to influence Fed policy.

Senator Thom Tillis, a Republican from North Carolina who sits on the Banking Committee that oversees Fed nominations, said the administration’s intentions were now unmistakable. “If there was any doubt that advisers inside the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should be none now,” Tillis said, according to the AP.

Markets responded immediately. All major U.S. markets fell when trading opened Monday, bond yields rose, and the value of the dollar fell.

Why the Fed’s independence matters

The Federal Reserve controls the short-term interest rate that drives borrowing costs across the economy. Lowering that rate makes credit cheaper and stimulates spending; raising it slows economic activity and fights inflation. The Fed’s short-term rate currently stands at 3.6%, its lowest level in nearly three years.

Economists have long favored independent central banks because they can more readily take politically unpopular steps to fight inflation — such as raising interest rates, which makes mortgages, car loans, and credit card debt more expensive for households.

The case for independence was forged in the prolonged inflation of the 1970s. The Fed chair at the time, Arthur Burns, is widely regarded by economists as having allowed inflation to persist by yielding to pressure from President Richard Nixon to keep rates low ahead of the 1972 election.

Paul Volcker, appointed Fed chair by President Jimmy Carter in 1979, reversed course. He raised the short-term rate to nearly 20%, triggering a severe recession and unemployment of nearly 11%. By the mid-1980s, inflation had returned to low single digits. Most economists regard Volcker’s willingness to inflict economic pain in order to bring down inflation as a defining example of why Fed independence matters.

Investors broadly share that preference. Most favor an independent Fed because it handles inflation more reliably without political interference and because its decisions are more predictable — officials regularly discuss publicly how they would adjust policy if economic conditions changed. If the Fed were more susceptible to political influence, markets would find it harder to anticipate its decisions, and greater uncertainty would push up borrowing costs.

Turkey offers a recent cautionary parallel. President Recep Tayyip Erdogan forced the central bank to hold rates low in the early 2020s even as inflation soared to 85%. When Erdogan allowed the bank greater independence in 2023, inflation began to fall — but short-term rates climbed to 50% to bring it under control and remain elevated.

What Trump can and cannot do

The administration’s focus on the $2.5 billion headquarters renovation appears designed to establish grounds to remove Powell “for cause” — the standard most legal experts interpret as requiring misconduct or neglect, not mere policy disagreement. The Supreme Court suggested last year, in a ruling involving other independent agencies, that a president cannot fire the Fed chair solely for disagreeing with his decisions.

Powell is expected to contest any removal attempt, and the dispute would likely reach the Supreme Court, according to the AP. His term as Fed chair expires in May, at which point Trump may name a successor through the standard appointment process.

Trump is also seeking to remove Governor Lisa Cook over unproven allegations of mortgage fraud. Those accusations were made by Bill Pulte, a Trump designee to the Federal Housing Administration. Cook’s board term runs until 2038; forcing her departure would allow Trump to install a loyalist before that date.

Governor Adriana Kugler resigned unexpectedly in August, roughly five months before her term ended. Trump has nominated his chief economist, Stephen Miran, as a potential replacement, though the appointment requires Senate confirmation.

Even replacing the chair does not guarantee the policy outcomes Trump has pursued. Twelve members of the Fed’s rate-setting committee hold a vote on whether to raise or lower interest rates, and the Fed cut rates in three of the last four months of 2025.

Former President Biden appointed four of the seven current board members: Powell, Cook, Philip Jefferson, and Michael Barr.

What Congress controls

Congress defines the Fed’s objectives through legislation. In 1977, it gave the central bank a “dual mandate” to maintain stable prices and pursue maximum employment. The Fed defines stable prices as an inflation rate of 2%. The same law requires the Fed chair to testify before the House and Senate twice a year on the economy and rate policy.