Every living former head of the Federal Reserve condemned an “unprecedented” attempt by the Trump administration to weaken the US central bank’s independence, after the Department of Justice opened a criminal investigation into its chair, Jerome Powell.
Ex-Fed chairs Alan Greenspan, Ben Bernanke and Janet Yellen warned similar prosecutorial attacks in other countries had led to “highly negative consequences” for the cost of living – and argued they had “no place” in the US.
Late on Sunday, it emerged that the justice department had served the Fed with grand jury subpoenas on Friday, threatening a criminal indictment related to Powell’s testimony before the Senate banking committee in June last year, regarding renovations to the Fed’s historic office buildings in Washington DC.
In response, Powell argued he had been threatened with criminal charges because the Fed had set interest rates “based on our best assessment of what will serve the public, rather than following the preferences of the president”.
The move amounts to a significant escalation in Donald Trump’s extraordinary attack on the Fed’s independence. The US president has repeatedly blasted Powell and the central bank for declining to bow to his demands for rapid interest rate cuts, and launched an aggressive campaign to and exert greater control over its decisions.
Trump has moved to distance himself from the investigation, claiming he was unaware of it. “I don’t know anything about it,” he told NBC News. The justice department did not respond to a request for comment.
Several Republicans criticized the department’s pursuit of Powell on Monday.
Thom Tillis of North Carolina, a member of the Senate banking committee that oversees Fed appointments, said he would oppose any nominee for the central bank “until this legal matter is fully resolved”. Kevin Cramer of North Dakota, another committee member, also called for a swift end to the investigation.
Ex-Fed officials and policymakers also sounded the alarm, warning that this action could damage the US economy. “The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine that independence,” a blunt statement signed by 13 former senior officials, including Greenspan, Bernanke and Yellen, said. “This is how monetary policy is made in emerging markets with weak institutions, with highly 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 at the foundation of our economic success.”
Economists also cautioned that Trump’s attempts to influence the Fed risk plunging the US into a period of 1970s-style inflation, and triggering a global backlash in financial markets.
A string of analysts drew parallels to when price growth soared after the then president, Richard Nixon, put pressure on the Fed chair, Arthur Burns, to ease monetary policy to help smooth his 1972 election campaign.
On Monday, however, Wall Street was calm. The benchmark S&P 500 was flat at lunchtime in New York, while the tech-focused Nasdaq Composite was up 0.3%
Allies of Trump spent months last year accusing the Fed of mishandling the multibillion-dollar renovations. Trump had repeatedly threatened legal action.
In his response on Sunday, Powell insisted the legal threat was “not about” his testimony last summer, or congressional oversight of the Fed. “This is 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 directed by political pressure or intimidation,” he said.
Powell, initially appointed by Trump, and reappointed by Biden, has chaired the Fed since 2018. His term as chair is due to expire in May – at which time Trump’s chosen successor can take his place – although Powell can remain on the Fed’s board of governors until 2028.
Kevin Hassett, a senior White official and director of the National Economic Council, is seen as the favorite to succeed Powell as Fed chair. Trump said last week he had made a decision, and when asked by the New York Times about Hassett, Trump described him as “certainly one of the people that I like”.
Asked about the justice department’s investigation on Monday, Hassett claimed that he respected the independence of the Fed. “I guess the question is, if you think the building cost $20bn, or $10bn, do you think at some point that it’s appropriate for the federal government to investigate? And seems like the justice department has decided that they want to see what’s going on over there.
“And if I were Fed chair, I would want them to do that,” he added. “I think that it’s really important to understand where the taxpayer money goes, and understand why it goes this way or that.”
