Justice Department Subpoenas the Fed, Threatens Powell with Criminal Indictment. Powell Comes out Swinging. Stock Futures Tank

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 got that backwards. 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. Tills 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.