Powell Faces DOJ Probe as Fed Independence Battle Escalates
Federal Reserve Chair Jerome Powell reveals criminal investigation over headquarters renovations, calling it a pretext for White House pressure on interest rates.
Markets woke up Monday to a constitutional crisis brewing between the White House and the Federal Reserve.
Fed Chair Jerome Powell dropped a bomb Sunday night: the Justice Department served grand jury subpoenas on the central bank Friday, threatening criminal charges over renovations at Fed headquarters. Powell's response was blunt—he called the probe a "pretext" for President Trump's campaign to force lower interest rates.
Stock futures slid immediately. S&P 500 contracts dropped 0.6%, while Nasdaq 100 futures fell 0.7%. The dollar weakened and gold hit another record high as investors trimmed exposure to U.S. assets.
What Powell Said
In a rare video statement, the Fed Chair didn't mince words.
"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," Powell said.
He characterized concerns about the building renovation project—a multibillion-dollar overhaul of the Fed's Washington D.C. headquarters—as a cover for the real dispute: monetary policy independence.
Powell added that he "will not bow to intimidation" and intends to serve out his term, which expires in May.
The Investigation's Stated Focus
The subpoenas relate to Powell's testimony to Congress about the headquarters renovation. Prosecutors appear to be examining whether he misled legislators about costs and project management.
The renovation has indeed faced scrutiny. Construction costs ballooned beyond initial estimates, and the project timeline slipped repeatedly. But building problems are not typically criminal matters—they're administrative headaches that get handled through oversight hearings and GAO audits.
That distinction is exactly Powell's point. The criminal investigation threat represents an unusual escalation that critics say has nothing to do with construction and everything to do with rates.
Trump's Response
President Trump denied involvement when asked about the investigation Sunday evening.
"I don't know anything about it, but he's certainly not very good at the Fed, and he's not very good at building buildings," Trump told reporters.
The statement doesn't quite add up. Trump has publicly criticized Powell's rate decisions for months and said last week he's already chosen a successor for when Powell's term ends in May. Kevin Hassett, head of the National Economic Council who favors more aggressive rate cuts, is reportedly the frontrunner.
Market Implications
The immediate reaction tells the story. Traders see this as a genuine threat to Fed independence—one of the foundational assumptions underlying U.S. asset prices.
Treasury yields moved in opposite directions depending on maturity. Short-term rates held steady (the Fed still controls those), but longer-dated yields jumped as investors demanded more compensation for policy uncertainty. The yield curve steepened.
Bank stocks fell sharply. JPMorgan and Citigroup dropped about 1% in premarket trading, adding to pressure ahead of earnings reports this week. The timing couldn't be worse—major lenders are set to report starting Tuesday, and now they face questions about how a politicized Fed might affect their businesses.
What Happens Next
The legal path forward is murky. Federal Reserve governors serve 14-year terms and can only be removed "for cause"—typically interpreted as misconduct in office, not policy disagreements.
A criminal indictment would be unprecedented and would almost certainly trigger a Supreme Court challenge. But even the threat creates uncertainty that markets hate.
Senator Thom Tillis, a North Carolina Republican on the Senate Banking Committee, blasted the investigation and said he'd block any Fed nominees "until this legal matter is fully resolved." That bipartisan pushback could complicate Trump's plans to reshape the central bank.
For traders, the calculus is straightforward: Fed independence has been a given for decades. If that assumption wavers, risk premiums rise across the board. Monday's opening bell will show whether investors think this is political theater or something more serious.