The US Department of Justice has opened a criminal investigation into Federal Reserve Chairman Jerome Powell as Donald Trump’s White House steps up its campaign against central bank independence.
In a video posted on Sunday, a usually reticent Powell took the extraordinary step of calling off the probe as punishment for failing to set interest rates according to the US president’s wishes.
This is just the latest development in a long line of White House attacks on the Fed. Here’s what we know about what’s going on.
Related: Ex-Fed chairmen condemn Trump’s attempt to weaken the central bank’s independence
Who is Jerome Powell?
As Fed chairman, Powell has been the central bank’s public face since 2018. Trump initially appointed him to a four-year term, and then Biden reappointed him in 2022. His term as chairman will end in May.
Powell alone does not set interest rates. He sits on the Federal Open Market Committee (FOMC), the 12-member board that votes eight times a year on any changes to interest rates. Although Powell has only one vote in 12, he has enormous influence as the most influential voice on the state of the US economy.
Why is the Justice Department investigating the Fed chair?
The Justice Department has said the probe is about a potential “misuse of taxpayer dollars,” but has been tight-lipped about any specifics. Much of what we know so far comes from Powell’s video.
The investigation is an escalation of attacks the White House has made before on renovations to the Fed headquarters in Washington DC. Over the summer, Trump blasted Powell for the project and its $2.5 billion cost, instead of the $1.9 billion originally budgeted for 2019.
Trump accused Powell of overseeing a lavish renovation, such as a VIP dining room and garden terrace. “There may be fraud involved with the $2.5 billion,” the president claimed at the time.
The Justice Department sent the Fed with grand jury subpoenas and threatened criminal charges, according to Powell, related to testimony he gave before the Senate Banking Committee in June.
The testimony in question comes from a regularly scheduled semiannual update the Fed chairman gives to the Senate Banking Committee on the state of the economy in June.
In brief comments that represented less than two minutes of a two-hour session in which he answered questions from senators about the economy, Powell said the renovations are needed for safety reasons at buildings that haven’t undergone major renovations since the 1930s.
“There is no VIP dining room, there is no new marble,” he told senators. “We took down the old marble, we are putting it back. There are no special elevators, they are just old elevators.”
How did Powell respond to the investigation?
Powell responded on Sunday with a remarkable defense of the Fed’s independence and laid bare the White House’s unprecedented campaign to cut interest rates. The investigation amounts to an “unprecedented action [that] it should be seen in the broader context of the administration’s threats and continued pressure,” he stated.
“This new threat is not about my testimony last June or the renovation of the Federal Reserve buildings. This is not about the oversight role of Congress; the Fed through testimony and other public disclosures has made every effort to keep Congress informed about the renovation project. These are pretexts,” Powell said. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best judgment of what will serve the public, rather than the president’s preferences.”
Powell affirmed his commitment to public service and “standing firm in the face of threats.”
It is the first time Powell, who has spent much of the past year refusing to publicly address Trump’s criticism, has responded so directly to the White House’s aggression. The president has often publicly mocked the Fed chair in social media posts for being a “very bad person” and accused him of harming the US economy.
Why are people concerned about this?
A statement signed by every living former Fed chairman condemned the investigation and warned that similar political attacks on independent central banks have led to unstable economies and rising costs of living.
“It does not happen in the United States, whose greatest strength is the rule of law, which is the foundation of our economic success,” the statement said.
The move also rattled some Republican senators, whose support Trump will need to get his nominee for Fed chairman approved before Powell’s term ends in May.
Thom Tillis, a Republican senator from North Carolina, said he would oppose whoever Trump nominates to replace Powell as Fed chairman “until this legal matter is fully resolved.” Alaska Sen. Lisa Murkowski called the investigation “coercive” and warned that the economy would suffer if the Fed lost its independence.
Economists also sounded the alarm, warning that Trump’s attempts to influence the Fed could risk plunging the US into a period of 1970s-style inflation and trigger a global backlash in financial markets.
Why is Trump attacking the Fed?
Trump has long wanted the Fed to cut interest rates, arguing that cutting rates would save “$1 billion a year” and boost economic activity.
Powell and many of his colleagues at the Fed are taking a more cautious approach. Fed economists often refer to the central bank’s “dual mandate”: to moderate rising prices while keeping unemployment low. Cutting rates too quickly risks higher inflation in the long run, but rates that are too high can stagnate the labor market.
Those complexities appear to matter little to the White House, which has pushed relentlessly for significantly lower rates since Trump took office.
Last spring, Trump privately told aides he wanted to fire Powell. He backed off when markets reacted poorly to the news, but did not let up on his pressure campaign.
After Trump spent weeks trying to drum up steam over Fed overhauls, the White House went on to fire Fed Governor Lisa Cook, a voting member of the FOMC who was appointed by Joe Biden. The Supreme Court temporarily reinstated Cook and will hear arguments on her dismissal next week.
Why is Fed independence so important?
The independence of the Federal Reserve was a key part of its structure when it was created by Congress in 1913. Economists have long studied the importance of a central bank that is not influenced by politics. Markets depend on the central bank to be a constant presence in the economy, making decisions based on economic data instead of the whims of politicians.
The only say the president and Congress have over the Fed is who gets to sit on its board, with terms lasting 14 years. And while the president can fire other executive branch leaders, removing someone from the Fed’s board must be “for cause” — an argument at the heart of the upcoming Supreme Court trial over Cook’s firing.
In his statement, Powell suggested that the White House is waging an existential battle against the Fed. “It’s 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 driven by political pressure or intimidation,” he said.