A yearlong tug-of-war over interest rate policy between the White House and the Federal Reserve has broken out into the open, with political and economic implications that are just beginning to play out.
On Sunday evening, Fed Chair Jerome Powell posted a video on social media saying what many in political and economic circles had already assumed. Mr. Powell said that the Justice Department had threatened criminal charges over statements he made to Congress about office renovation costs as a pretext to pressure him to lower interest rates. By going public, however, Mr. Powell has created the most public confrontation between a president and a Fed chair in at least 75 years.
“There’s nothing like this” in recent Fed history, says Michael Bordo, an economic historian emeritus at Rutgers in New Brunswick, New Jersey. “Presidents have in some way or other tried to push the Fed to lower rates, but none were as obvious and direct and threatening as this president, where the administration used the legal system to go after somebody.”
Why We Wrote This
The Federal Reserve’s independence from partisan politics is a cornerstone of U.S. economic stability and market confidence. A Justice Department criminal probe of Fed Chair Jerome Powell may signal new risk to this principle.
The latest confrontation raises the stakes for both President Donald Trump and Mr. Powell.
Politically, the charge in Mr. Powell’s post puts President Trump on the hot seat. By publicly making the Fed’s independence the central issue, Mr. Powell is highlighting a principle widely supported in business, market, and even political circles: Independent central banks make better decisions than politically dominated ones. The question is whether Mr. Trump will buck that principle, or back off from what many observers see as a coercion campaign.
Legally, the outcome remains to be seen. Will the Department of Justice secure a grand jury indictment against Mr. Powell? If it does, will it overcome the steep challenge of winning in court? Will it be influenced by a U.S. Supreme Court case – being argued later this month – about the president’s effort to fire another Fed governor, Lisa Cook?
Economically, the record strongly supports the idea that central banks should remain independent. When central bankers set rates, inflation tends to stay in check and economies prosper. When political leaders are in charge, inflation tends to rise. That’s because political leaders want rates low as a way to buoy business.
“The business cycle doesn’t align with the political cycle,” says Aaron Klein, a senior fellow at the Brookings Institution. Sometimes, the Fed has to enact short-term stressors, such as raising interest rates, to fend off inflation. By doing so, it enhances the chances of a stabler and stronger economy long-term, he adds.
Building backlash
The backlash to the Trump administration’s move is beginning to build.
On Monday, three former Federal Reserve chairs and four past Treasury secretaries blasted the administration in a statement. “The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine [the Fed’s] independence,” wrote Ben Bernanke, Janet Yellen, and Alan Greenspan, joined by Robert Rubin, Henry Paulson, Timothy Geithner, and Jacob Lew.
“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,” Mr. Powell said in his statement, a video post on the official website of the Fed’s Board of Governors.
Mr. Trump has said he didn’t “know anything about” the investigation. Still, there are recent examples of the president pushing for prosecutions of his political adversaries, such as former FBI Director James Comey.
Two Republican senators have also signaled their opposition to the administration’s moves. In a statement Sunday night, retiring Sen. Thom Tillis of North Carolina said he would oppose the confirmation of any Fed nominee “until the legal matter is fully resolved.” On Monday, Sen. Lisa Murkowski of Alaska posted on the social platform X, “It’s clear the administration’s investigation is nothing more than an attempt at coercion. …. If the Federal Reserve loses its independence, the stability of our markets and the broader economy will suffer.”
Privately, a growing number of CEOs are also expressing unease about the administration’s direction toward a more hands-on economic role for the White House, says Jeffrey Sonnenfeld, founder and president of the Chief Executive Leadership Institute at Yale University. For example, energy industry CEOs are resisting Mr. Trump’s plans to use their money to rebuild Venezuela’s oil fields. “They’re already mad about that,” he says. The moves against Fed independence have “just added another log to the fire.”
Mr. Powell’s decision to publicly counter the president borrows from the playbook of board member Marriner Eccles in 1951, when the central bank struggled with President Harry Truman over its independence. Truman wanted the Fed to continue its wartime agreement to keep interest rates low to finance the war effort, though inflation was raging. Truman met with members of the Fed and then publicly announced they would continue the wartime policy.
In fact, no such agreement was made, and Eccles made public his own version of the meeting.
Eventually, with the help of Congress, the Fed prevailed, reestablishing its independence in a formal accord.
Echoes of previous DOJ charges
These are not the first charges of lying to Congress that the Justice Department has pursued against a Trump political adversary during this term in office. The DOJ filed similar charges against Mr. Comey in September after public pressure from Mr. Trump.
“We can’t delay any longer, it’s killing our reputation and credibility,” the president wrote in a social media post days before the Justice Department secured a grand jury indictment against Mr. Comey.
The former FBI director pleaded not guilty to the charges, but a judge threw out the case two months ago after ruling that the prosecutor who brought it had been unlawfully appointed. The Justice Department is appealing the ruling.
Mr. Powell says the Justice Department is investigating allegations that he lied to Congress about the costs of renovations to Federal Reserve offices in Washington during a June hearing before the Senate Committee on Banking, Housing, and Urban Affairs.
Responding to reports that the renovation includes ornate features such as special elevators, water features, and a rooftop garden, Mr. Powell said that some of those claims “are just flatly misleading.”
“Some of those are no longer in the plans,” he added. “The plans have continued to evolve.”
Cost overruns for federal infrastructure projects are typically investigated by Congress alone. When the Department of Justice can get involved is if, during that investigation, a potential criminal offense is uncovered.
That is what happened here, when in July, Rep. Anna Paulina Luna – a Florida Republican and staunch Trump ally – asked the Justice. Department to investigate Mr. Powell “for potential perjury and making false statements to officials.” Official project documents contradict Mr. Powell’s congressional testimony, she claims.
Such prosecutions are rare, however. “False statement cases can be easy to charge but very difficult to prove,” says Paul Butler, a professor at Georgetown University Law Center and a former federal prosecutor in Washington, D.C.
Winning such a case requires that a jury find, beyond a reasonable doubt, that a defendant lied “knowingly and willfully” and “with an intent to deceive.” The U.S. Attorney’s Office for the District of Columbia, which is handling the investigation, said it does not comment on ongoing investigations.
Some Trump officials, meanwhile, say that they believe a criminal investigation is warranted.
Kevin Hassett, the White House’s National Economic Council director, told reporters Monday morning that if he were Fed chair, he would want DOJ scrutiny of the renovations. (Mr. Hassett has been short-listed to replace Mr. Powell.)
“I think that it’s really important to understand where the taxpayer money goes, and understand why it goes this way or that,” he added.
Supreme Court side story
Parallel to the investigation into Mr. Powell is the Trump administration’s effort to fire Ms. Cook, a member of the Federal Reserve Board.
Members of the Federal Reserve can only be fired “for cause,” according to federal law. But the Trump administration has been pressing to change that rule for other leadership positions in the executive branch.
Given the importance that financial experts place on insulating U.S. monetary policy from political influence, the Fed has emerged as an exception to arguments that the president should have the power to remove board members unilaterally. In an unsigned order in May, the U.S. Supreme Court wrote that the Fed is entitled to for-cause removal protections because it’s a “uniquely structured, quasi-private entity.”
Next week, the justices may consider that Fed exception in more depth when they hear oral argument in the Cook case. Of more relevance to Mr. Powell, however, is what interest the court may have in the definition of “for cause.”
Ms. Cook is facing allegations of mortgage fraud from the Trump administration, but formal criminal charges have not yet been filed. Ms. Cook’s lawyers have called the allegations “baseless,” but Trump officials could argue that allegations of a crime alone are enough “cause” to fire her.
Thus, “an investigation of Powell, even without charges being brought, could be sufficient to fire [him] for cause, just like how he’s trying to fire Lisa Cook,” says Professor Butler.
Staff writer Victoria Hoffmann contributed reporting for this story.
