Attack On U.S. Fed Independence Poses Major Risks

• The United States (U.S.) Department of Justice recently opened a criminal investigation into Federal Reserve (Fed) Chair Jerome Powell over the cost of the renovations of the building. This has raised significant questions about the Fed’s independence.
• The probe is a significant attack on the Fed’s independence by the Trump administration and continues the trend of institutional erosion. In response, U.S. Fed Chair Jerome Powell, who has been very careful not to step into partisan debate (despite attacks from President Trump in recent years), made a formal video announcement, claiming that the investigation was politically motivated.
• Many former Fed Chairs and Treasury Secretaries have voiced support for Powell, as have several Republican lawmakers. However, U.S. Treasury Scott Bessent, who is very close to President Trump, was not aware of the launch of the investigation, which also points to a disconnect in the Trump administration’s approach.
• While potential Fed Chair nominee Kevin Hassett claimed that the investigation would improve accountability, BMI analysts believe it is another step that would mark a significant erosion of the Fed’s independence. Though it is important for key officials to be accountable, the combination of investigations into Lisa Cook and Jerome Powell points to an antagonistic relationship between the administration and the institution, which could also weaken the nomination and confirmation process of future Fed officials.
• That said, the probe does not pose significant risks to BMI’s forecast for two quarter percentage points basis point (25bps) interest rate cuts this year; however, it does raise other important questions.
• First, it could make the confirmation of the next Fed Chair more difficult, given opposition in the Senate, creating uncertainty. Second, if the Fed cuts interest rates significantly in the face of sticky inflation, it could lead to significant financial market volatility. Over the short-term this could lead to an increase in bond yields and the term premium as investors demand higher yields. The U.S. dollar could also come under additional pressure similar to 2025.

(Source: BMI, A Fitch Solutions Company)