After years of attacks on Federal Reserve Chairman Jerome Powell, President Donald Trump's administration may have crossed a red line by launching a criminal investigation into the 72-year-old former investment banker. Republican lawmakers and former top policymakers have come to Powell's defense, while markets have signaled a potential backlash if the president undermines the independence of the world's most important central bank.
The reaction spread to the global level overnight: leading central bankers from Europe, England, Canada, South Korea and other countries signed a statement “in full solidarity with the Federal Reserve System and its Chairman Jerome H. Powell.” This is a testament not only to the relationships Powell has built over his years in central banking, but also to the importance of the Fed to the functioning of global financial markets.
Central bank independence - the ability to set interest rates based on long-term goals rather than short-term political interests - remains widely accepted, among both conservative and liberal economists, as the best way to curb inflation.
Powell's announcement that the Justice Department was investigating his statements regarding the Fed building project, which he made before the Senate Banking Committee last June, quickly led to an unusual scene: three former Federal Reserve chairmen compared the US to weak developing countries, global officials accused Trump of crossing a red line, and Republicans, with unusual fervor, distanced themselves from the president to defend Powell.
Powell, a lawyer and former Treasury Department official in the administration of Republican President George HW Bush, built bipartisan support during his 14 years at the Federal Reserve, working to bolster the Fed's reputation among members of Congress.
“The alleged criminal investigation of Federal Reserve Chairman Jay Powell represents an unprecedented attempt to use prosecutorial pressure to undermine the Fed,” said a statement signed by former Federal Reserve Chairs Janet Yellen, Ben Bernanke and Alan Greenspan. “This is how monetary policy is conducted in developing countries with weak institutions, with profoundly negative consequences for inflation and the functioning of their economies more broadly. It has no place in the United States, whose greatest strength is the rule of law, which is the foundation of our economic success.”
The announcement came after Powell released an extraordinary video address on Sunday, in which he said the Trump Justice Department had opened a criminal investigation into statements he made to Congress last summer regarding the ongoing renovation of the Federal Reserve headquarters complex in Washington.
It is the first time that, after years of insults and pressure from Trump — who appointed Powell as Federal Reserve chairman in 2018 — Powell has hit back so openly. It is also a sign of how high the stakes are in the increasingly fierce battle for control of the Fed, an institution whose special legal structure and role in economic governance have made it more protected from Trump than other nominally independent agencies, where the president has already made sweeping changes to its top management.
To exert maximum influence over the central bank, Trump would need a majority on the seven-member Fed Board of Governors, so he could shape not only interest rates but a range of regulatory and economic issues — even to the point of being able to remove the heads of the Federal Reserve’s 12 regional banks. “To really shake up the system, Trump needs four governors who will do what he tells them,” said Yale School of Management professor William English, a former head of the Fed’s monetary policy department.
Trump is already trying to remove Fed Governor Lisa Cook, in a case that will be decided by the U.S. Supreme Court next week. Many legal experts expect the attempt to fail.
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