Yves here. Trump’s latest power play may prove to be another backfire. Astonishingly, the Trump Administration is pursuing criminal charges against Fed chair Jerome Powell over a building renovation that has gone a bit pear shaped. This is a bizarre show of vindictiveness since Powell’s term ends in May and even the subpoena process will not advance much by then.
Mr. Market is not taking interference with the Fed at all kindly. If Trump thought trying to push the Fed yet again to lower interest rates would goose stock prices, he’s generating the reverse. One top of that, Republican member of the Senate Banking Committee, Tom Tillis, has said he will not approve any nomination to the Fed until the legal matter is resolved and excoriated Trump’s sabotage of the “independence and credibility” of the Department of Justice. Tillis vote is not enough to change outcomes but even this level of opposition from the Republicans is a sign of how unhappy the finance and business community is with Trump trying to have the central bank fall in line with his dictates.
As we have repeatedly pointed out, as we saw during the super-low interest rate era, dropping interest rates does little to help the real economy. Most businesses do not decide to expand because money has gone on sale. Low costs of financing will not lead enterprises to add to their operations in the absence of promising conditions in their markets but high borrowing costs can constrain activity. This is why lowering interest rates to try to spur activity is often called “pushing on a string”.
The big exception to this rule is leveraged speculators like traders, private equity….and to some degree, real estate operators.
So again, Trump’s fixation on the Fed resisting his pressure and personalizing that in Powell, and now taking abusive action, looks like yet another manifestation of his extreme need to dominate. And of course Trump is now trying to play innocent now that this gambit is running into opposition.
Wolf Richter’s post below contains a section of the coverage by the New York Times and the text of Powell’s response. Further reactions from the financial press. First the Wall Street Journal:
In an extraordinary video statement Sunday night, Powell called the investigation a pretext as part of President Trump’s ongoing campaign to pressure the Fed to lower interest rates, and end the independence of the central bank….
A criminal investigation of the Fed chair could rattle Wall Street, where some investors have already braced for more volatility this year as Trump picks Powell’s successor.
“We are stunned by this deeply disturbing development which came out of the blue after a period in which tensions between Trump and the Fed seemed to be contained,” Krishna Guha of Evercore ISI said in a note to clients Sunday evening.
With Powell set to be replaced as chair in four months, the escalation raises questions about whether the Fed will continue to make decisions free from political interference, a principle that economists and market participants have long viewed as important for economic stability.
The Journal also calls out Trump’s lame protestation about having nada to do with the grand jury subpoena:
The investigation, which is being run out of the office of Washington’s U.S. attorney Jeanine Pirro, a close Trump ally, began in November and is examining Powell’s congressional testimony and the Fed’s spending records, people familiar with it said. …
Trump last month threatened a lawsuit against Powell over the renovation of two historic buildings overlooking the National Mall. “We’re thinking of bringing a suit against Powell for incompetence,” said Trump.
And Powell could elect to stay on the Fed board:
Administration officials have also said they want Powell to resign his seat as a governor after his term as chair ends this year. Powell has the option to remain on the Fed’s board until early 2028, though outgoing chairs typically don’t stay on the board after they conclude their term as chair.
Reuters opened its account with the Tillis rebuke and later noted:
POWELL INQUIRY A ‘LOW POINT’ IN TRUMP PRESIDENCY
Trump has demanded the Fed cut rates sharply since resuming office in January, blaming its policy for holding back the economy and musing about firing Powell despite the legal protections ostensibly covering the Fed chair from removal. He is also trying to fire Fed Governor Lisa Cook in a case that is now pending before the Supreme Court.
The independence of central banks, at least in setting interest rates in order to control inflation, is considered a central tenet of robust economic policy, insulating monetary policymakers from short-term political considerations and allowing them to focus on longer-term efforts to keep prices relatively stable.
The inquiry into Powell “is a low point in Trump’s presidency and a low point in the history of central banking in America,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. “Congress did not design the Fed to reflect the president’s daily fluctuations, and because the Fed has rebuffed President Trump’s efforts to take the Fed down he is launching the full weight of American criminal law against its Chair.”
Financial markets reflected little change in near-term expectations for Fed policy even after Powell’s term as chair ends in May, with rate-futures continuing to price in two rate cuts for the year.
The dollar fell and U.S. equity futures slid on the latest news, but the moves were relatively modest so far.
The Financial Times made the row its lead story. From its account:
It [the investigation] comes as US President Donald Trump has repeatedly attacked Powell, calling him a “stubborn mule” for declining to cut borrowing costs more aggressively.
Gold rose to a record high on Monday following the news of the DoJ investigation, gaining as much as 2 per cent to hit $4,600 a troy ounce. Bullion tends to rally when Fed independence is perceived to be under threat.
The dollar fell 0.5 per cent against a basket of half a dozen peers. Futures tracking the blue-chip S&P 500 share index declined about 0.7 per cent. The yield on the 10-year Treasury, which moves inversely to the price, climbed 0.03 percentage points to 4.2 per cent….
Blake Gwinn, head of US rates strategy at RBC Capital Markets, said: “Markets will start to price in greater inflation expectations, inflation risk premium, and term premium if the Fed’s independence comes under further attack.
“We don’t appear to have hit it yet, but every action is another step closer to it.”
By Wolf Richter. Originally published at Wolf Street
Trump claims he didn’t know anything about it
In a major escalation of Trump’s efforts to oust Powell and knuckle the Fed under, the Justice Department served the Fed with grand jury subpoenas and threatened Powell with a criminal indictment related to his testimony to Congress last June about the renovations of the historic buildings of the Federal Reserve in Washington, D.C.
This was first reported by the New York Times Sunday night, based on sources:
“The U.S. attorney’s office in the District of Columbia has opened a criminal investigation into Jerome H. Powell, the Federal Reserve chair, over the central bank’s renovation of its Washington headquarters and whether Mr. Powell lied to Congress about the scope of the project, according to officials briefed on the situation.
“The inquiry, which includes an analysis of Mr. Powell’s public statements and an examination of spending records, was approved in November by Jeanine Pirro, a longtime ally of President Trump who was appointed to run the office last year, the officials said.”
The criminal investigation was then confirmed by Powell in an extraordinary video statement, where he came out swinging. Here is his statement in full:
Good evening.
On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.
I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve—is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.
This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.
I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment. Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.
Thank you.
Upon which stock futures tanked, with Nasdaq futures -0.95% and S&P 500 futures -0.63% Sunday night.
Trump said in a brief interview on NBC News that he didn’t know anything about the investigation by the Justice Department:
I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings.
The pushback from Senate Banking Committee member Senator Thom Tillis, R-N.C., was swift. In a statement, he said that he’d oppose the confirmation of any nominee for the Federal Reserve Board of Governors, including the next chair, until this situation is resolved:
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. It is now the independence and credibility of the Department of Justice that are in question.
I will oppose the confirmation of any nominee for the Fed—including the upcoming Fed Chair vacancy—until this legal matter is fully resolved.
This video is about the exact opposite of economic fedspeak, at least by federal reserve standards. It’s unusually direct in calling out the administration, naming the reasons for the dispute, and the President directly. Powell is very definitely taking a stand for central bank independence, as he understands it.
Lovers of central bank independence will probably rate this next to “fight them on the beaches”, as goldbugs go hopping mad at the “unelected fed”. But as the truth is often the first causality of war, so it is with the internecine bickering of bureaucracies in the imploding American state. To whit.
Let us all be realistic. We lived through 2008, the bailouts, and nearly a decade of ZIRP, taper tantrums, and covid funding, not to mention 40+ years of central bank coddling of financialisation and deindustrialisation and general class warfare. All were expressly politically, even ideologically, driven. I’m sure there was a lot of economic conditions and evidence, but it is naive to believe or argue that the Fed or any central bank is a wholly apolitical institution, or that at times decisions weren’t made on the express (albeit consensus) demand of the political system.
Trump and his admin are imploding, but this does not give the Fed or Powell let to daub themselves in resistance flags to survive the petite-revolution unscathed. This is simply a, yes, political effort to slide into the winning faction of elites, so that whatever earthquakes shake the state, the present emiserating financial status quo will survive the ructions unscathed, at least for the next round. And there will forever be a next round while the FIRE economy remains unreformed. I say sincerely: “A plague o’ both your houses!”.
Oddly enough, the goldbugs and the preserve the Fed’s independence crowd are on the same side.
Trump is a goldbugs bestie. The more he attacks the Fed, the higher gold goes.
Trump is a goldbugs bestie.. Lol, yes he is. Obviously, goldbugs have other supporters as well, none of them pleasant to consider.
Trump has acted as a kind of real world experiment. The hard-money, end-the-Fed crowd (I used to be a member) always raged against the Fed, but it turns out that the real threats to destroy the currency are politicians.
Trump has good company, as you suggest … Mugabe, Peron, and those Weimar Republic dudes.
I have to differ. I watched the crisis unfold.
You underestimate the power of cognitive capture. The Fed is full of and normally led by monetary economists, as in strong form neoliberals. Even though the central bank is burdened by having too much economic stewardship imposed on it thanks to willful negligence by Congress, its top duty is to assure the safety and soundness of the banking, now the financial, system. Even that duty is contradictory: the safety, as in health, part, means the Fed has to want banks to be at least adequately profitable. There is a tension between that and making sure they don’t take a lot of risk.
On top of that, not often enough discussed is that the second major duty of a central bank is to provide war finance.
Compared to Congress, the Administration, and the courts, the Fed really is not politicized as much as intellectually and practically captured (the latter by being so much focused on finance community).
I am not saying this outcome is good, but we should endeavor to understand how it comes about.
Were there no heterodox economists at all? I’m asking because I recall Michael Hudson once telling a story that every firm in Wall Street had its Marxist to make sure to have a different point of view; would it not make sense for the Fed to do the same? Now, of course Wall Street is merely beholden to profits, whether they come from Marx or Mises in theory makes no difference, whereas a central bank is much more embedded in the whole social apparatus. Nonetheless, it got me curious. Of course, even if it did it probably would not have made much of a difference.
Fed’s obsession has , if I am not wrong, always been inflation inflation, inflation which can be interpreted as protective of the rentier classes. If so, it is politically motivated (not really independent) and anything but neutral. Defending the independence of the Fed is a politically motivated position.
I am wondering if private equity and other leveraged speculators, compared to simple people with savings, have nowadays a bigger role in the economy than in the past… Might it imply a “political shift” about the motivations of the Fed amongst the professional & managerial castes? Might Trump find unexpected support to this move? For instance, would the AI people welcome a change in Fed policy?— Particularly investors on AI centres.
It was not that way until the 1970s stagflation took hold and discredited American Keynesians (who deviate from Keynes….will skip over details for now) in favor of monetarists (Chicago School/Milton Friedman). The highly esteemed among central bankers Paul Volcker thinks inflation should be zero. But he also at least believed in very strict regulation of banks too. Nearly all the economists at the Fed are monetarists.
Monetarists have gotten a continuing boost by the Swedish Central Bank Prize Named After Alfred Nobel being awarded nearly all the time to their ilk.
Correct me if I am wrong but as I recall, during the great financial crisis, those monetarists repeatedly implored congress to enact fiscal solutions so they wouldn’t have to use the monetary hammer.
At that time the GOP did not want to aid the economy because it might give Obama a win. The congressional cowboys were forcing the Fed to adopt extraordinary practice to stimulate the economy all the while screaming hyper-inflation. The real threat of hyper-inflation rises when a head of government takes over the central bank to facilitate debt repayment and finance military adventures.
When will the American people say “Enough” and unite to force this grifting unmitigated clown and his parasitic administration out of office? His sheer incompetence is staggering and his moral compass extinct!
“Sheer incompetence” could also be applied to George W Bush and he stayed in for eight years.
His War efforts are estimated to have a long term cost of 8.8 trillion dollars or about 25K per capita.
Then there was the loss of civil liberties, housing bubble and more.
That leaders such as Bush, Biden, Trump and Obama get elected is evidence of the rot.
How do you propose the American people force “his grifting unmitigated clown and his parasitic administration” out of office? Asking as a genuine question, because I don’t see a way the Joe and Jane Six-packs accomplish it.
And especially with the readily available goons, the result of 25+ years of wars, for hire that can subdue even the well armed US populations, and the militarized police forces, trained by Israel to regard the population like Israelis see the Palestinians…
Will the shot that killed the poor woman in Mineapolis be heard across the nation? Most will read the message and hide from now on.
General Strike until his paymasters force him out.
Trump doing what Trump does, moving fast and breaking stuff so his friends can pick it up on the cheap.
My personal opinion is this is heading directly towards hyperinflation, but what do I know.
The rules of governance here are changing rapidly. My crystal ball (the one I nicked off Marianne Williamson) is nothing but mist.
Stay safe.
Hyperinflation is a Jubilee done one better in that it wipes out accumulated debt along with accumulated digital wealth, all in one fell swoop.
The scramble to get rid of greenbacks as they tank will be like Brewster’s Trillions, and the only thing of sizable value in the USA to spend it on is real estate, so we will see the mother of all housing bubbles~
Think $128 million fixer upper in Pacoima
Any financial instrument issued by the state is a liability of the state (cash/reserves and Treasuries both) and assets for the private sector. The sum of all state liabilities (the national debt) is precisely equal to the financial wealth of the private sector. Reducing the so-called national debt is not even a coherent idea.
We are nowhere close to hyperinflation in cash – the opposite in my opinion, our communities are starving of it. As for Treasuries – we are already close.
Ever given any thought to the idea that we best represent post WW1 Germany, but substitute war reparations for national debt, both staggering numbers.
Not quite the right comparison, since reparations were in foreign monies, which Germany could not create, and the national debt of the USA is in dollars, which it can create. This doesn’t mean there are no consequences, but the difference is very important, as Third World countries figured out to their great chagrin.
All debt is not created equal. Good debt accrues wealth to the future. Bad debt leaves a hole. For instance the GFC was much caused by bad loans to buy housing, thank you Allen Greenspan. Financing highway construction facilitates commerce for decades.
You raise the key question, which Keynes raised, too. Can anyone predict the future? They cannot.
ALL debt is potentially ‘bad’, depending on how fast Fortuna is spinning the wheel. Today, it is very fast and our leaders are blind to it because they have to be.
Give me a break. When Greenspan tells Joe six pack to get a variable rate loan and buy real estate they can’t afford, anyone with their head screwed on should know he is just setting up an extraction harvest for his banking buds. When the federal govt. invests in essential infrastructure that builds social wealth that pays off for everyone. If all debt is potentially bad then all debt is also potentially good. I don’t think anyone really believes that.
I don’t think all debts can be potentially good, since there are debts which by definition cannot be paid on the moment they are signed (I guess you could count winning the lottery as a technical means to do so, but this is hardly realistic and certainly cannot be made general by definition), whereas catastrophe can potentially make all debts bad (say, a war which destroys all confidence in the government? Or maybe the country sinking under the ocean), even ones which were good in the first place. I agree though that there are kinds of debts (all the rotten mortgages that were packaged pre-2007) which are odious from the onset, and those that aren’t (which have social value). I mean, the Babylonians had it kinda figured out by forgiving peasants’ loans but not merchants’ loans.
Powell should have been indicted long ago for obstruction of justice, for failing to provide information on the illegal trading during blackout periods done by the Chairs of the Dallas Fed ($millions in trades) and one other. Both should have gone to jail. Powell refused to release their records.
Powell had no obligation to “release records” to an outside party. The issue is weak penalties within the Fed who handle the issue.
https://www.banking.senate.gov/newsroom/majority/brown-to-federal-reserve-prohibitions-on-stock-trading-need-teeth
Either Trump is losing the plot or else he is still on a high over the kidnapping of Maduro. And his Sergeant Schulz defense of him knowing nothing is less credible than him pretending to know nothing about the recent assassination attempt of Putin. There is no way that AG Pamela Bondi would have done this off her own bat without clearing it with Trump first due to the political ramifications. The whole thing makes no sense. He could have said and done nothing until Powell’s term ended and spent the time lining up his ducks for his own yes-man candidate. Instead, through this ham-fisted attempt to get rid of Powell a bit early he has even got the markets in an uproar and will have a much, much tougher time pushing through a candidate of his choice. And when Powell does step down, he is going to find that a lot of his time will be spent dealing with the consequences of this fiasco.
I’m beginning to believe more and more that he got some health related news that they’re keeping from the public, and the admin is speed running as much of the MAGA wishlist as they can before they lose him and control of the cult. That and a recent discussion (here on NC?) that he probably has a form of non-alzheimers dementia and, unfortunately, will probably get even more erratic and irascible as time goes on…
This is my theory as well. JD doesn’t strike me as being able to pull all these things off or pick up whatever is still unified of the MAGA and Trump’s decline allows him to be easily manipulated. He probably really believes he knew nothing about this, even if I orchestrated the whole thing.
Yes, Trump’s mental condition (possibly white matter disease) has been discussed here several times, e.g.:
https://www.nakedcapitalism.com/2025/12/links-12-16-2025.html
ICE has arrived in Washington to tell Powell to get out of the car.
Much of the commentary around this episode rests on concepts that deserve more scrutiny than they usually receive. The “independence” of central banks from government is often treated as a sacred principle, but in practice it is a myth: fiscal and monetary authorities interact continuously through debt issuance, reserve management, banking regulation, and crisis response. The real question is not independence, but whether policy tools are being used coherently.
Inflation itself is also widely misunderstood. Are we talking about consumer prices, asset prices, or financial instability driven by leverage? Over the past decade, ultra-low rates did little to stimulate productive investment but contributed substantially to asset inflation, while recent rate hikes have raised costs across the economy and increased government interest payments – an effect that is itself inflationary.
Modern Monetary Theory has long taken a pragmatic view here: interest rates are a blunt and unreliable lever in a complex system, prone to unintended consequences. From that perspective, using rate hikes to “fight inflation” is often counterproductive. A more coherent approach would be to set the risk-free policy rate at or near zero (or modestly positive) and leave it there, while recognizing the central bank’s core roles as lender of last resort, regulator of the banking system, and steward of financial stability.
That last role is now the most urgent, as shadow banking and non-state money creation – particularly through crypto and related instruments – are expanding rapidly beyond effective oversight. Whatever one thinks of Trump’s conduct, the deeper problem is not political pressure on the FED, but an ongoing failure to grapple honestly with what money is, how inflation actually works, and what central banks can and cannot control.
I think that with crypto and the like we’re not seeing more non-state money creation (which is nearly always the case with private banks anyway) but the proliferation of all sorts of strange assets propped by ZIRP, carry trade and other pathological means of wanton speculation. Bitcoin hardly works as a money of account (too volatile and more deflationary than gold, which makes debts denominated in it a catastrophe) or as a means of payment (costly and a pain to transfer, and also to my knowledge Bitcoin in and of itself is no-one’s liability, though liabilities can be created on top of it), so I genuinely can’t see it being anything but a way for people to steal other people’s money.
Though I have no love for the theory of central bank independence (if nothing else China showed that you can do all the funny things capitalism can do without it) the fact is that the system as it is currently structured more or less takes it as the number one criteria for trustworthiness in a particular money. This attack on Powell is probably not so important because the system really needs independence to work, but because enough people act as if it did. Maybe all this signals is the end of the monetarist dominance, which by no means implies that better things will necessarily follow.
Here we go with asset inflation again. I largely agree with our comment but:
https://www.slowboring.com/p/asset-price-inflation-is-not-a-thing
Inflation is your money being worth less. The stock market on balance reflects real assets. So if the dollar is declining in value maybe you should put your cash into, say, global equities
It’s an interesting thing. Powell is responsible for much of any of the “success” we’ve had in the last two admins. Especially tariff policy against the EU and London, who now hold substantially less cards with the FEDs implementation of SOFR. The fed wasn’t fully in control of monetary policy if the Euro dollar system was in effect, since the European banks were really the key holders there. It pairs well the chips act too. Remember for what 2 decades people scaring us about what happens when China stopped buying treasuries? They haven’t been a substantial buyer for a while now, and we haven’t batted an eye because Europeans are buy treasuries like crazy. Especially in London. Powell obviously fumbled the ball big time with the transitory narrative, but otherwise has been largely positive for the US.
What is making the Europeans do that? Rising interest rates? Given Nordstream, Greenland and other US acts of war it seems like a poor choice. Unless they’re admitted to being a de facto protectorate and having a special relation to their metropole.
Adam Tooze also had a piece on the issue today: https://adamtooze.substack.com/p/chartbook-425-war-over-the-fed-is
Trump lies in his sleep, so is not to be believed when denying knowledge of this latest attack against the Fed..