The decision by US prosecutors to launch a criminal investigation into Jay Powell, the chair of the Federal Reserve Board ( Fed), is an extraordinary escalation of the battle between the central bank and the Trump administration. The probe is into Powell’s handling of a $2.5 billion renovation of the Federal Reserve’s headquarters and information he gave to Congress about it. But there is no doubt that, despite Donald Trump’s denials, this is part of his wider campaign to try to bully the Fed, the US central bank, into lowering interest rates more rapidly.
On Sunday, Powell received grand jury subpoenas and a threat of criminal indictment from the justice department. He has come out fighting, saying that the threat 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.”
The pressure on the Fed is in line with Trump’s approach of seeking to control all arms of state, ignoring the checks and balances normally provided by congress, the courts and, in the case of monetary policy, the Fed. The president has referred to Powell as a “ stubborn mule” and sought to remove another Fed governor, Lisa Cook, over allegations of mortgage fraud. With Powell due to step down in May, Trump is set to announce a replacement who will push his policies – but still cannot resist this typically vindictive move.
The chipping away at Fed independence will concern investors, as a failure to control inflation has serious consequences. If fears rise of a reckless policy approach, then the US dollar could take a further hit, while the longer-term consequences could be seriously disadvantageous to the US and cause wider instability.
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For now, funds are moving into safe assets such as gold and the dollar and US government bonds are edging lower. The risk is that investors take fright about the inflation outlook and there is a more serious sell-off. Central bank independence is a cornerstone of economic stability, underpinning expectations about inflation. Trump interferes with it at his peril .
