Jerome H. Powell wanted to avoid a fight. That had long been his approach in dealing with President Trump and his relentless attacks on the Federal Reserve, which had intensified in his second term.
Between an executive order that wrested more control from the Fed over Wall Street oversight to Mr. Trump’s attempt to oust a sitting member of the policy-making Board of Governors, the Fed had stuck to a tried-and-tested strategy: Avoid provoking the president. Sometimes that meant giving in to his demands in areas like climate change and banking regulation. But Mr. Powell, the Fed chairman, drew the line at protecting the central bank’s autonomy in setting interest rates.
A criminal investigation revealed by The New York Times on Sunday into whether Mr. Powell lied to Congress has led the central bank to abandon its cautious approach and fight. The outcome of the fight could determine whether the Fed remains an independent entity.
“Trump is now exercising the nuclear option, so there is no longer any reason for Powell not to express his opinion,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
Mr. Powell’s decision to push back, made in a rare video message on Sunday evening, marks the most difficult moment in his roughly eight years at the helm of the central bank. Mr Powell, whose term as chairman ends in May, must now decide how hard he wants to fight and whether he wants to retain his role as governor, a term that expires in 2028.
A “new threat”
Mr. Powell and Fed staff worked through the weekend after the Justice Department served the central bank with grand jury subpoenas late Friday. The highlight was a two-minute video released Sunday evening in which Mr. Powell bluntly denounced the government for trying to use a criminal investigation into costs related to the Fed’s renovation of its headquarters as a “pretext” to force the central bank to cut borrowing costs.
“This new threat is not about what I said last June or about the renovation of the Federal Reserve buildings,” Powell said Sunday. “The threat of criminal charges is a result of the Federal Reserve setting interest rates based on our best judgment of what serves the public, rather than the president’s preferences.”
The Fed has cut interest rates only gradually, cutting them by 0.75 percentage points since September to a new range of 3.5 to 3.75 percent. Mr. Trump called for interest rates as low as 1 percent and called Mr. Powell a “fool” and a “stubborn mule” for refusing to budge.
Friday’s subpoenas relate to renovations that have been underway at the Fed headquarters in Washington since 2022. The sprawling project, scheduled to be completed in 2027, is $700 million over budget and is expected to cost around $2.5 billion.
Mr. Trump used the renovations this summer as a new line of attack against the central bank, accusing Mr. Powell of mismanagement and taking the rare step of stopping by the construction site for a tour. Legal experts saw this as a possible basis for an attempt to remove the Fed chairman for “cause,” the only justification a president can use to lawfully fire a central bank official. The reason for this is usually gross misconduct or dereliction of duty during the term of office, although this has never been verified.
President Trump and Mr. Powell last year during a tour of the renovation of the Fed’s headquarters. Mr. Trump has threatened to fire Mr. Powell but has not yet done so.Credit…Haiyun Jiang/The New York Times
Mr. Powell’s decision to respond directly via video reflected the explosive nature of the Justice Department’s actions. Never before has a Fed chairman been criminally investigated. It also marked a marked departure from the administration’s previous attacks on Mr. Powell, which have typically taken the form of personal insults toward Mr. Trump. The president, who nominated Mr. Powell for the post in his first term, had also threatened to fire the Fed chief but did not act on it. Nevertheless, Mr. Powell had preemptively retained outside counsel and retained Williams & Connolly, a leading litigation firm in Washington.
Instead, Mr. Trump sought to oust Lisa D. Cook, who was appointed to the Fed by the Biden administration. The president referred to allegations of mortgage fraud and said he had reason to fire her. Arguments in the case will be heard in the Supreme Court on January 21.
Mr. Powell, a lawyer by training, and close advisers viewed the Justice Department investigation as a sharp escalation of the government’s affront to the institution that required a forceful response.
Mr. Trump denied knowledge of the U.S. attorney’s investigation, saying on Sunday that he “didn’t know anything about it, but he’s certainly not very good at the Fed and he’s not very good at building buildings,” referring to Mr. Powell.
In the past, Mr. Powell had shied away from commenting directly on the president’s attacks. Instead, he spoke about the importance of the Fed maintaining its longstanding independence, a protection Congress gave the central bank to allow officials to set interest rates with the goal of achieving low, stable inflation and a healthy labor market, rather than to benefit those in the White House. But that changed on Sunday.
“He didn’t mince his words,” said Kenneth Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund. “He tends to turn the other cheek and has gotten to the point where he can’t do it anymore.”
“The Fed seems to recognize that this government rarely stops pressuring people and organizations to get what it wants, so anyone who doesn’t give in to that pressure will ultimately have to fight back,” added Douglas Elmendorf, a former director of the Congressional Budget Office who teaches at Harvard.
Mr. Powell received the support of every living former Fed chair on Monday, as well as several former Treasury secretaries, who called out what they called “prosecutorial attacks to undermine that independence.”
“This is how monetary policy is designed in emerging markets with weak institutions, with extremely negative consequences for inflation and the functioning of their economies in general,” they wrote in a joint statement.
Janet L. Yellen, who served as Fed chair between 2014 and 2018 and was among the signatories of the statement, said in an interview that the investigation represents the biggest attack ever on the central bank’s independence.
“The fact that he is willing to go to such lengths to intimidate a Fed official suggests that he will stop at nothing to get his way on Fed policy,” she said.
“If you can accuse your enemies for no reason, we no longer live in a society governed by the rule of law.” She added: “This is the end of the Fed’s independence.”
Independence threatened?
The guardrails protecting the Fed’s independence were created by Congress to prevent a president from having undue influence over major policy decisions that have a significant impact on the performance of the economy.
One of the most important protection measures concerns the seven members of the powerful Board of Governors. These officials are nominated by the President and confirmed by the Senate, but they cannot be fired at will. They also have staggered terms of 14 years.
Rate decisions are voted on by a 12-member committee made up of members of the board of directors, the president of the Federal Reserve Bank of New York and a rotating group of four presidents of the 12 regional banks.
If Mr. Powell decides to stay on as governor — something he has declined to comment on publicly — that would deprive Mr. Trump of the opportunity to appoint another member to the board.
“It’s harder for him to leave now,” Scott Alvarez, the Fed’s former general counsel, said of Mr. Powell. “If he leaves now, it’s a mystery. If they hadn’t done anything, maybe he would have just left.”
The president received an unexpected vacancy in August when Adriana Kugler suddenly resigned as governor after repeatedly violating the central bank’s trading rules. He hired one of his top economic advisers, Stephen I. Miran, for the job, who was only on temporary leave from the White House.
Mr. Trump is also in the final stages of selecting Mr. Powell’s successor to the presidency. Kevin A. Hassett, the director of the White House National Economic Council, is one of the top contenders.
In an appearance on CNBC on Monday, Mr. Hassett said he was “not involved” in the Justice Department’s decision to investigate the Federal Reserve. He said he had not been informed of the matter and that he would “expect” that the president had not been informed of it either.
Mr. Hassett was asked repeatedly during the interview about the extent to which the president hoped to use the investigation to pressure the Fed to cut interest rates, telling CNBC at one point: “Over time we’ll find out whether it looks like a pretext.”
When asked about the investigation on Monday, Karoline Leavitt, the White House press secretary, took the opportunity to criticize Mr. Powell.
“One thing I know for sure: Jerome Powell is not very good at his job,” she said in an interview with Fox News. “The Justice Department must find an answer to the question of whether he is a criminal.”
In a sign that the investigation could have implications for the Senate confirmation process, Sen. Thom Tillis, Republican of North Carolina and a member of the Banking Committee, vowed Sunday that he would oppose any Fed nominee, including any future chair vacancies, citing reports of subpoenas.
The investigation will also have far-reaching implications for Ms Cook’s case. The Supreme Court will decide how much leeway a president has to fire a Fed official and the extent to which he can define what constitutes cause.
“I hope the Supreme Court is watching, because it would undermine the independence of the Federal Reserve if the president could remove someone from office based on an allegation rather than a finding of criminal conduct,” Alvarez said. “The fact that the DOJ claimed this does not make it true.”
Kathryn Judge, a professor at Columbia Law School, added: “The Federal Reserve will not remain independent if the president feels entitled to use every tool at his disposal to bully and intimidate Fed officials.”
Tony Romm and Alan Rappeport contributed reporting.