Criminal investigation into Powell: concern grows over the independence of the Fed and its possible effects
14 JAN, 2026
By Joanna Piwko from RankiaPro Europe
Donald Trump has intensified the pulse with the Federal Reserve, prompting the Department of Justice to open a criminal investigation against the central bank's president, Jerome Powell, for the costly remodeling works of the Washington headquarters.
The move, unprecedented in recent times, fuels fears about the solidity of the Fed's independence and the possible effects on financial markets.
The remodeling project, approved in 2017, has seen the estimated budget increase from about 1.9 to 2.5 trillion dollars. For months, Trump and his allies have used this cost increase as a lever to question Powell's management, raising hypotheses of incompetence or corruption. The president has also hinted that he wants to dismiss Powell "soon", in parallel to the attacks for the slowness of the rate cuts.
Jerome Powell investigated: Implications for markets and monetary policy
Carlo Benetti, Market Specialist at GAM Investments
The response of the central bank's president has been unusually harsh and, in practice, has accused the Department of Justice of bending its powers to the pressures of the White House to condition the direction of monetary policy.
Markets will continue to question the central bank's ability to resist the administration's wishes; they will assess whether future rate cuts will be consistent with the conditions of the scenario or if, on the contrary, they will be signals of acquiescence. Prices could start to discount scenarios of higher inflation, despite the possible arguments that Trump will use to influence the new direction of the Federal Reserve: the financing of the federal debt —unsustainable without real rates contained— and the stability of the dollar as an imperial currency, which requires credibility and coercive force.
Throughout 2026, approximately a third of the US federal debt will mature, largely composed of short-term securities issued between 2020 and 2021 to finance the pandemic emergency. From a technical point of view, the roll over does not pose an immediate risk: the Treasuries market remains deep and liquid. The crucial knot refers rather to the cost of refinancing, which could increase significantly if confidence not only in fiscal sustainability, but also in the credibility and independence of monetary policy, were to crumble.
In a context of growing politicization of institutions, the risk premium required by investors could be reflected in higher rates, transforming a manageable problem of maturities into a structural pressure on public accounts.
Benoit Anne, Senior Managing Director and head of the Market Analysis Group at MFS IM
The Fed is once again in the spotlight. After a few weeks of less tension, the independence of the Fed is once again under attack, which seems to be a significant escalation. Specifically, the Department of Justice sent subpoenas to the Fed, threatening with a criminal charge in relation to the Fed chairman's testimony before Congress in June about the ongoing renovations at the Fed's headquarters.
This event is likely to cause disruptions in the confidence of global investors, at least in the short term. On this basis, we anticipate that the US dollar will be subject to downward pressures, while it is likely that the yields of US Treasury bonds will increase, especially at the long end. In addition, it is likely that risk assets, including stocks, will also face temporary aversion.
It will be important to pay attention to how the Treasury Secretary communicates about the Fed's events, particularly if he intends to reassure the markets about this serious issue. In general, we believe this strengthens the arguments in favor of global diversification. In particular, we believe that emerging markets are well positioned to provide that much-needed diversification, especially in the face of the risks of a falling dollar.
Jon Butcher, Senior Economist for the US at Aberdeen
The initial reaction of the markets seems to be negative, and we see an increase in the risks that a devaluation negatively affects the US dollar, stocks, and bonds. In particular, the long end of the curve could experience an increase in term premiums.
This also raises questions about the composition of the Federal Reserve's board of governors. The next chairman is expected to be named this month, likely taking over the governor's position from Stephen Miran, whose term ends on January 31. However, Republican Senator Thom Tillis has stated that he will oppose any nomination to the Fed "until this legal matter is fully resolved.
Powell's term as governor extends until 2028, and it was expected that he would leave after his term as chairman ends in May. However, his statement will raise doubts about whether he will continue as governor to support the Fed's independence, despite the legal risks.
Regardless of whether this legal action has merit, it indicates that the Administration is willing to continue pressuring the Fed to apply a more flexible monetary policy. Given that President Donald Trump is also considering fiscal measures that would increase the deficit, we expect more doubts to arise about fiscal dominance and an external risk of yield curve control".
Pedro del Pozo, Director of Financial Investments at Mutualidad
It seems clear that the driving force behind this accusation comes from the White House and, of course, the high level of pressure President Trump is placing on the Federal Reserve is striking, specifically in his stated intention to push the monetary authority to cut interest rates further and faster. Considering that Powell’s term is ending soon, we understand this pressure not only as direct pressure on Powell for the upcoming Fed meetings, but also as pressure on the Fed as an institution as a whole. If the Fed were to give in to this pressure and inflation did not eventually fall, or growth accelerated more than expected, the market would probably become very nervous by anticipating a path of rate hikes sooner than expected in the medium term.
