Fed's dispute with the DOJ may reduce the likelihood of additional interest rate reductions

Federal Reserve Faces DOJ Probe Amid Political Tensions

Federal Reserve Chair Jerome Powell has come under scrutiny as President Donald Trump urges the central bank to lower interest rates.

Wall Street and Main Street on Edge

The Justice Department’s criminal investigation into the Federal Reserve and Powell’s firm response have already unsettled financial markets, with potential consequences for everyday Americans as well.

According to several experts, the ongoing legal dispute reduces the likelihood of the Fed cutting interest rates this year. Lower rates typically mean cheaper loans for both consumers and businesses, which can help boost economic activity and job growth.

Powell’s Future and the Fed’s Leadership

Powell’s current term as chair is set to expire in May. However, after subpoenas were issued to the Fed last Friday, Krishna Guha, vice chairman at Evercore ISI, suggested that Powell may remain on the board to help safeguard the institution after his chairmanship ends.

There is also a possibility that Powell could continue as chair for longer than anticipated. Senators Thom Tillis and Elizabeth Warren have both advocated for the Senate Banking Committee to halt votes on any Trump administration nominees to the Fed while the investigation is ongoing.

Other board members appointed during the Biden administration are also more likely to stay. If this scenario unfolds, Krishna Guha noted, the committee responsible for setting interest rates would likely approve fewer rate cuts than previously expected.

JPMorgan analysts went a step further, stating in a note to investors that they now anticipate the Fed will keep rates unchanged through 2026.

Political Goals and Economic Policy

This development could hinder one of the Trump administration’s main objectives. President Trump is expected to nominate a new chair who shares his preference for more aggressive rate cuts. Trump has frequently criticized Powell for not reducing rates quickly enough, despite having nominated him in 2017.

Before implementing three rate reductions late last year to support a weakening job market, the Fed had maintained higher rates to combat inflation. Prior to Powell’s announcement regarding the investigation, both the markets and the Fed were anticipating one or two rate cuts this year.

Powell Responds to Charges

Powell stated that the criminal allegations stem from his previous testimony before the Senate about cost overruns related to the Fed’s building renovations. He characterized these charges as a pretext designed to pressure the central bank on its interest rate decisions, rather than addressing genuine oversight issues.

“The threat of criminal prosecution is a direct result of the Federal Reserve making interest rate decisions based on our independent judgment of what best serves the public, rather than following the president’s wishes,” Powell said in a written statement and a rare video address.

Trump Denies Involvement

In an exclusive interview, President Trump denied any knowledge of the subpoenas issued to the Fed.

The Fed’s Role and Global Impact

The Federal Reserve is crucial to the stability of the U.S. economy, with its primary responsibilities being to control inflation and promote maximum, sustainable employment.

A prolonged conflict could erode international trust in the Fed’s independence, as well as the stability of the U.S. economy and the dollar, which serves as the world’s reserve currency. The dollar’s value dropped early Monday, making imports more expensive and reducing the global value of U.S. exports.

How the Fed Sets Policy

When inflation is high or the economy overheats, the central bank raises rates to slow borrowing and growth. Conversely, when the job market weakens, it typically lowers rates to encourage economic activity.

Historically, the Fed has made these decisions independently, without interference from elected officials, including the president. UBS analysts warned that concerns about market reactions and the perception of diminished institutional independence could make the Fed more hesitant to cut rates.

Importance of Central Bank Independence

Economists consistently emphasize that the Fed’s autonomy is vital for maintaining America’s reputation as a safe haven for innovation, entrepreneurship, and foreign investment.

Several former top economic officials, including all living former Fed chairs, issued a statement calling the reported criminal investigation into Powell an unprecedented attempt to undermine the central bank’s independence through legal intimidation.

Experts caution that if the Fed yields to political pressure instead of responding to economic realities, it increases the risk of policy errors driven by short-term political interests, such as election outcomes.

Upcoming Decisions

The Fed’s policy-setting committee is scheduled to announce its next interest rate decision on January 28.