DoJ launches criminal investigation into Fed's Powell - what's going on and how could it affect rates?

Gold rallied to fresh record highs and the US dollar fell along with stocks on Wall Street as the US launched a criminal investigation into Federal Reserve chair Jay Powell, relating to a multi-billion-dollar renovation project of the Fed's headquarters.

Powell rejected the “unprecedented action” from the DoJ, saying it was designed to attack the Fed’s independence to set interest rates and fits a pattern of threats and pressure from the White House.  “This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings,” Powell said in a video statement. “The threat of criminal charges 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.”

We are seeing a revival of the ‘sell America’ trade that flared up in the wake of Donald Trump’s Liberation Day tariffs.

That’s because the market is worried about Fed independence and its ability to set interest rates based on objective economic evidence. Trump has called Powell a "numbskull" for his refusal to cut rates to 1%, with the current range for the Fed funds rate at 3.50 - 3.75%. The DoJ investigation - though Trump said he knew nothing about it - is being seen by most as blatant intimidation of Powell and the Fed itself.

If the Fed is no longer independent then the market could also lose faith in the Fed to control not just inflation and unemployment but also tackle the next financial crisis.

Here’s how this could play out in terms of higher inflation, greater term premia for bond yields and inflation risk premia, which would tend to be positive for gold, and negative for Treasuries, USD and potentially for US stocks.

Powell’s term as Fed Chair ends in May, but he could stay on as Governor until January 2028. Most Fed chairs step down from the Board when they give up the chair.

Should he stay on the Board, another member would need to step down for either of Trump’s picks Kevin Warsh or Kevin Hassett to become Fed Chair.

Governor Stephen Miran - a Trump appointee who has called explicitly for deeper rate cuts – would be the likeliest candidate – he has to step down as Governor role this month. He is completing Adriana Kugler’s term, which ends on 30 January, although he could remain on the board if Trump re-nominates him and the Senate confirms.

But if Powell resigns from the Board and the Supreme Court says Trump can remove Lisa Cook from her Governor role, the two Kevins could join Miran on the Fed Board. 

This could see a board composed of three Trump nominees willing to press for deeper rate cuts even if the economy doesn’t need them.

That said, it’s not going to be that easy for Trump to get his way on rates. The Fed’s Board of Governors reappointed eleven of the twelve regional bank presidents last month. So, a changing of the guard moment may be harder for Trump to pull off than the headlines suggest. Meanwhile, Powell has fought back and vowed to do his job – it will be interesting to see whether the DoJ investigation persuades him to remain on the Board through 2028.

All this comes against a backdrop of intense geopolitical drama...Greenland, Iran, Venezuela, Mexico....the list goes on.

Trump said on Sunday that “Greenland should make an agreement” to avoid Russia or China taking over, arguing that the US would take Greenland “one way or the other”.

Key meetings are set for this week. The foreign ministers of Denmark and Greenland, Lars Løkke Rasmussen and Vivian Motzfeldt, are due to meet US secretary of state Marco Rubio in Washington on Wednesday. Meanwhile a group of US senators are to visit Copenhagen to talk with politicians from the Danish parliament’s Greenland committee.

Meanwhile we’re keeping an eye on events in Iran and possible military action by the US. Check out the full week ahead here. Or check out today's podcast with my colleague John.