Powell Faces Criminal Investigation While Fed Holds Rates Steady

Federal Reserve Under Unprecedented Pressure

The Federal Reserve finds itself at the center of an extraordinary political storm as Chair Jerome Powell prepares to announce the central bank's latest interest rate decision. This week's meeting will be overshadowed by the bombshell revelation earlier this month that the Justice Department has subpoenaed the Fed as part of a criminal investigation into testimony Powell gave last June about a $2.5 billion building renovation. It's the first time a sitting Fed chair has been investigated, and prompted an unusually public rebuke from Powell.

The central bank's interest rate-setting committee is almost certain to keep its key short-term rate unchanged at about 3.6%, after three straight quarter-point cuts last year. Fed Chair Jerome Powell said after December's meeting that they were "well positioned to wait to see how the economy evolves" before making any further moves. This decision comes despite intense pressure from President Trump, who has been pushing for more aggressive rate cuts to stimulate economic growth.

Powell said Jan. 11 that the subpoenas were "pretexts" to punish the Fed for not cutting rates as sharply as Trump wants. Powell will be "under even more pressure to underscore, 'everything we're doing here ... is all about the economics,'" said Claudia Sahm, a former Fed economist and chief economist at New Century Advisors.

Supreme Court Battle Over Fed Independence

The Federal Reserve's troubles extend beyond the criminal investigation. Not long after the Justice Department's subpoenas, the Supreme Court last week considered whether Trump can fire Fed governor Lisa Cook over allegations of mortgage fraud, which she denies. No president has fired a governor in the Fed's 112-year history. During an oral argument, the justices appeared to be leaning toward allowing her to stay in her job until the case is resolved.

As Powell holds the line against the White House's multi-pronged pressure campaign, Trump is actively preparing to unveil his successor. Powell's term as chair ends in May, and Trump says he has whittled down a list of potential nominees to just a few names. This timeline adds urgency to the current standoff between the administration and the independent central bank.

Economic Conditions Support Rate Pause

Despite the political drama, economic fundamentals appear to support the Fed's cautious approach to interest rates. The Fed's three rate cuts last year were intended to bolster the economy after hiring slowed sharply over the summer and fall in the wake of Trump's April tariffs on dozens of countries. However, recent data suggests the economy may be stabilizing.

After rising to 3% in September, inflation declined to 2.7% in November and held steady in December. But many economists believe those numbers could be somewhat distorted by technical changes to how data was collected last fall, caused by the six-week federal government shutdown. When the Fed lowers its short-term rate, it can over time influence other borrowing costs for things like mortgages, auto loans and business borrowing, though those rates are also affected by market forces.

Looking Ahead

Unless businesses start cutting jobs or the unemployment rate rises, the Fed is unlikely to cut rates again for at least a few months, economists say. If inflation slowly declines this year, as economists expect, the Fed may cut again in the spring or summer. Wall Street investors expect just two quarter-point rate reductions this year, according to futures prices.

The president's efforts to pressure the Fed may have backfired, economists say, as Republicans in the Senate voiced support for Powell and threatened to block Trump's replacement chair. "The last couple of weeks have been pretty positive for Fed independence," said Patricia Zobel, a former official at the New York Fed and now head of macroeconomic research at Guggenheim Invesments. The outcome of this unprecedented confrontation between the White House and the Federal Reserve could reshape the central bank's independence for years to come.