The Justice Department’s criminal investigation into the Federal Reserve and its chairman, Jerome H. Powell, appears to be over. But the ramifications for the central bank are likely to prove much longer-lasting.
Nine months after President Trump made a hasty visit to the Federal Reserve headquarters in Washington and promised to “take a look” at a costly renovation, the administration concluded its investigation with apparently nothing to show for it. Far from the criminal charges they once brought, prosecutors left in their wake a dark cloud over the institution and the person Trump chose to lead the central bank.
The change of course has, for now, eliminated the immediate threat of further escalation against the Federal Reserve. It has also potentially cleared the way for Trump’s nominee for Fed chair, Kevin M. Warsh, to succeed Powell, whose term ends on May 15.
What will be much harder to regain is confidence in the Federal Reserve’s ability to operate independently of a White House that has shown little restraint in its efforts to bully the central bank into slashing interest rates.
Even when Jeanine Pirro, federal prosecutor for the District of Columbia, announced that the investigation would be closed, she warned that she “would not hesitate” to reopen it if necessary. Pirro added that he had asked the Federal Reserve’s inspector general to take over the investigation, even though the internal watchdog had been investigating the matter since July.
White House press secretary Karoline Leavitt said Friday that the investigation “is still ongoing” and was simply being conducted “under different authority.”
Kathryn Judge, a professor at Columbia Law School and a Supreme Court law clerk for Justice Stephen G. Breyer, said she feared “lasting damage” from the Powell investigation, not just for the Federal Reserve but for policymakers across the government.
Until now, he said, officials have not had to worry about the repercussions of “taking a strong stance on policy issues in ways that are inconsistent with the president’s agenda.” But that was the kind of pressure Powell faced when Trump tried to force rates down.
Although the Federal Reserve cut rates last year, it did not provide the kind of relief Trump wanted. Since January, he has also become cautious about further reductions, a sentiment that has only grown amid the war in Iran, which has caused a sharp energy shock.
“So far, the Fed has demonstrated resilience in ways that have been quite helpful to the broader economy,” Judge said. He added that the country “cannot take for granted” that the Federal Reserve “will continue to demonstrate its resilience as it takes blow after blow from this administration.”
Since returning to the White House for a second term, Trump has been consistent in his desire to have more influence over the Federal Reserve, which has long set rates free of political meddling. That ability is critical, given the powerful role the central bank plays in guiding the economy and ensuring low, stable inflation and a healthy labor market.
For a time, the president’s attacks had come primarily in press conferences and on social media. At one point, he flirted with firing Powell, but never took that step.
However, Trump’s decision in August to try to oust Lisa D. Cook from the Federal Reserve Board of Governors over unfounded allegations of mortgage fraud was a serious escalation, which is now in the hands of the Supreme Court. The Justice Department investigation, which focused specifically on Powell and became public in January, crossed another threshold, quickly sparking widespread outrage.
In a rare video, Powell criticized the administration for trying to leverage legal threats to force the Federal Reserve to lower rates and warned about the institution’s ability to carry out its duties independently. Democrats and Republicans on Capitol Hill echoed those concerns, with many demanding that Trump step back.
Trump’s actions were especially distasteful to Sen. Thom Tillis of North Carolina, a Republican on the Senate Banking Committee. Tillis combined his criticism with a threat to block any future Federal Reserve nominee until the investigation into Powell was resolved. Republicans hold a slim 13-11 majority on the Banking Committee, giving Tillis the ability to try to confirm Trump’s election.
The investigation therefore created an immediate problem for Trump. In its attempt to unseat Powell, his administration had essentially complicated the very job of replacing the president with Warsh.
Since securing the nomination, Warsh has faced intense scrutiny over how he would run the Federal Reserve if confirmed by the Senate and whether he would defend its independence. At his confirmation hearing Tuesday, Warsh had to repeatedly dispel doubts that he would act as Trump’s “sock puppet,” given the president’s insistence during the selection process that he would choose only someone who supported lower rates.
Tillis had made clear that he supported Warsh and would vote for his confirmation if prosecutors dropped what he called the “trumped-up” charges. As of Friday night, Tillis had not indicated whether Pirro’s announcement, with the warning that he could reopen the case, was enough.
Powell has said he will remain president until the Senate confirms his replacement. A bigger question is whether he will serve out his term as governor, which runs through January 2028. That would give him one vote in every policy meeting while denying Trump a vacancy to fill with someone he believes will lower rates.
Powell previously said he would not leave the Federal Reserve “until the investigation is completely over, with transparency and finality,” but Pirro’s announcement on Friday may not have met that threshold.
Peter Conti-Brown, a Federal Reserve governance expert at the University of Pennsylvania, said Powell’s insistence on a clear and certain end to the investigation was “about not just protecting himself, but also protecting the Federal Reserve.”
“If this becomes a tried and true way to force a central banker out of office, then we will see it invoked again,” Conti-Brown said, adding that the investigation had already proven damaging in other ways.
“I think this has affected the willingness of central bankers to experiment,” he explained. He added that continued pressure would leave Fed policymakers inclined to “fight whatever comes their way using the tools that seem to them not the most appropriate” but rather the “least controversial.”
