The Trump administration has renewed its conflict with the Federal Reserve, initiating a criminal investigation against chairman Jerome Powell. This action has drawn comparisons to the inflation era of the 1970s, a period when political pressure weakened central banks, leading to uncontrolled price increases.
Economists have noted the parallels, citing the 2019 instance where Recep Tayyip Erdoğan, the president of Turkey, dismissed central bank governor Murat Çetinkaya for refusing to lower interest rates. The consequence of this decision was severe, resulting in the collapse of the Turkish lira and a surge in inflation.
Even in that situation, Erdoğan did not accuse the central banker of criminal activity. In the United States, Fed chair Jay Powell is now facing a federal investigation concerning a $2.5 billion renovation project for the Fed's headquarters.
Powell Breaks Protocol Amid Escalating Trump Pressure
As previously reported, Powell released a short video on the Fed's website, asserting that the investigation was a pretext orchestrated by Trump to compel deep interest rate cuts. This public response marked a departure from decades of Federal Reserve tradition and from Powell's own customary approach.
Larry Kudlow, former director of the National Economic Council, commented that Jeanine Pirro, the U.S. attorney in Washington, "may have pulled the trigger" on Powell "a little too fast."
The markets remained composed, with stocks showing minimal movement and bond yields holding steady. Investors appear to be betting on the Fed's resilience against pressure to reduce interest rates to near zero. Nevertheless, economists have described the situation as alarming. Since World War II, the White House and the Fed have served as pillars of global stability; now, they are in open conflict.
Klaas Knot, former head of the Dutch central bank, remarked that the U.S. once championed the institutions essential for a functioning market economy. He stated, "It was leading by example. They have apparently chosen to set an entirely different example."
The timing of these events is significant. Trump is scheduled to travel to Davos to promote his economic agenda while the Supreme Court is hearing arguments in the case of Lisa Cook, a Fed governor he attempted to remove over allegations of mortgage fraud. Lisa Cook denies these claims and has not been charged.
Political Backlash Complicates Trump's Plans for the Fed
The ongoing dispute between Trump and Powell has a history. After initially appointing Powell, the president became critical of him following interest rate hikes. During his second term, these attacks escalated.
Trump referred to Powell as a "stubborn mule" and a "numbskull," expressing a desire to "fire" him for refusing to lower rates to 1 percent. Subsequently, the White House focused its attention on the Fed building project, which is now $700 million over budget and is at the center of the Department of Justice probe.
Powell maintained silence for several months, even when Trump sought to remove Lisa Cook. This stance changed with the release of the video. Capitol Hill reacted, with Senator Thom Tillis of North Carolina voicing his support for Powell. Senators Lisa Murkowski and John Kennedy followed suit. On Wall Street, Jamie Dimon joined Christine Lagarde in advocating for central bank independence.
Glenn Hubbard, former chairman of George W. Bush's Council of Economic Advisers, commended Powell's handling of the video statement, saying, "He clarified what had happened. He didn’t editorialise." Hubbard also signed a letter, along with every living former Fed chair, condemning the probe.
Within the administration, divisions emerged. Treasury Secretary Scott Bessent publicly supported a review of the Fed but privately advised Trump against pursuing the investigation.
Treasury officials later asserted there was "zero daylight" between Bessent and the president. Hubbard characterized the episode as an "own goal of epic proportions."
The probe has created obstacles for Trump's efforts to reshape the Federal Reserve. Powell's term as chair concludes in four months, but he can remain on the board until January 2028. Allies suggest Powell is now reconsidering his resignation, which would enable Trump to appoint another aligned individual.
Senate confirmation presents another hurdle.
Senator Tillis has threatened to block any nominee unless the probe is dropped. If the situation persists, Powell could continue as chair. The controversy has also impacted Kevin Hassett, a close Trump associate. Hassett initially supported the probe, later stating, "I expect that there’s nothing to see here."
Later, Trump indicated he might retain Hassett in his current capacity.
Other potential candidates are being discussed. Kevin Warsh, Chris Waller, and Rick Rieder have remained silent. Stephen Miran, who received Senate approval, joined the Fed board last year.
James Egelhof of BNP Paribas commented that the Fed would adhere to its policy framework. Despite this, some investment funds are hedging their positions. Pimco, which manages $2.2 trillion, is reducing its dollar exposure. Paul Diggle warned of creeping politicization. Adam Posen noted that governments are developing strategies "not dependent on the U.S."
Even if the Department of Justice case is unsuccessful, economists caution that the repercussions may endure. Lael Brainard stated that officials might become hesitant to express themselves freely. "Everybody is nervous," she said, "that they too could be the subject of a criminal investigation."