Summary
News broke on Sunday night that the Federal Reserve received grand jury subpoenas from the Department of Justice on Friday, escalating the Trump administration’s pressure on the nation’s central bank. While we do not believe this will alter the near-term course of monetary policy, it will make the next Fed Chair’s job that much harder to build a consensus among the 19 members of the Federal Open Market Committee.
- The latest in a string of efforts to pressure the Fed: We believe it is worth highlighting that President Trump’s initial reaction was to claim he was unaware of the DOJ’s action. That said, the DOJ’s investigation follows a year in which the president has made it clear he is unhappy with the Federal Reserve’s monetary policy stance, which could have spurred administration officials to open up the investigation without an explicit green-light from President Trump.
- The timing strikes us as odd: Jerome Powell’s term as Fed Chair expires in May, leaving only three more FOMC meetings for him to preside over. However, Powell’s term as governor runs until January 2028, and there has been speculation about him staying on as a governor until then to help maintain Fed independence. We suspect the investigation may be an effort by the administration to put pressure on Powell to leave the Board of Governors entirely by May. An open investigation may increase the prospect of him staying to add his weight to preserving central bank independence, but we still see it as more likely than not that he departs after his 14 years of service.
- No influence over the near-term outlook for Fed policy: We do not believe this materially changes the outlook for monetary policy in the short-term. Chair Powell has shown time and again that he believes the best antidote to political pressures on the Fed is to follow the data and set policy based on the Committee’s assessment of the economic outlook, and we expect him to maintain that position. It is also important to remember that setting the federal funds rate is a Committee decision, with 11 other FOMC voters and 18 other FOMC participants involved in the process. Their own hawkish/dovish convictions will continue to be the primary determinant of monetary policy, in our view.
- The investigation could delay the confirmation of the next Fed Chair: Senator Thom Tillis (R-NC) stated last night that he would not support any nominee for Fed Chair until this legal issue is resolved. Given that he serves on the key Senate Banking Committee and has already announced plans to retire at the end of this year, this gives Tillis considerable leverage over the situation.
- More uncertainty for medium-term policy: The DOJ investigation reinforces the narrative that Trump will wield more influence over the next Fed Chair. This is likely to put the next Fed Chair in an even more difficult position of winning over an already divided Committee when it comes to the medium-term monetary policy outlook.
- Political pressure on the Fed, real or imagined, is not costless: Markets mostly took the news in stride, but the modest financial market moves thus far have been consistent with what we would expect to see when worries flare up about Fed independence: higher Treasury yields, a steeper yield curve, a weaker dollar and a rally in gold prices. We expect the FOMC will continue to make policy decisions on the basis of the economic environment—not the political environment—as was clearly laid out by Powell in a video statement yesterday. Nevertheless, this latest episode risks damaging the credibility of Fed independence and U.S. good governance practices.
