Federal Reserve Chair Jerome Powell has issued an extraordinary statement revealing that he is under federal criminal investigation, calling the probe a futile pressure tactic to force lower interest rates.
In a video statement posted on Sunday night, Powell said the Department of Justice had served the Fed with grand jury subpoenas threatening a criminal indictment over Powell’s Senate testimony about recent renovations to the Fed’s headquarters in Washington, DC.
Powell slammed the DOJ probe as an “unprecedented action” based on mere pretexts, saying the new threat must be viewed in the context of President Donald Trump’s unrelenting pressure campaign for lower interest rates.
“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.
“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation,” the central banker added.
Powell, first appointed as Fed chair by Trump himself in 2018, noted that he had served under the administrations of both Republicans and Democrats.
“In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment,” he said. “Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.”
The White House referred request for comment on Powell’s statement to the DOJ, which did not immediately respond to an inquiry from Realtor.com®.
Political risk puts upward pressure on mortgage rates
Powell’s remarks follows a prolonged pressure campaign for lower interest rates from Trump, who sees ultra-low mortgage rates as the keystone to improving housing affordability.
The Fed chair’s comments are “by far the most direct” response the Fed chair has yet offered following nearly a year of silence on the subject, notes Realtor.com Senior Economist Jake Krimmel.
“Powell is sending a clear message about what’s at stake: Fed and monetary policy independence,” says Krimmel. “With the administration’s intentions laid bare, Powell must believe that the only path for the Fed to maintain its independence and credibility is to take a much more direct approach, leveling with the American people, Congress, and global financial markets.”
The Fed uses higher interest rates to fight inflation, and lower rates to boost the labor market. By law and tradition, rate decisions are supposed free from political influence, and history shows that keeping rates artificially low can wreak havoc in financial markets and the broader economy.
Indeed, the 10-year Treasury yield, a key indicator for mortgage rates, touched its highest level in four months on Monday morning, rising above 4.2% as bond markets weighed the risk of diminished Fed independence.
Because mortgage rates are always somewhat higher than the 10-year yield, it will put new upward pressure on mortgage rates, which fell on Friday after Trump announced a plan to dramatically increase mortgage bond purchases by Fannie Mae and Freddie Mac.
“Trump could undo all his mortgage rate progress from last week’s mortgage-backed security play by injecting political risk and volatility into the bond market,” says Krimmel.
Trump’s showdown with Fed escalates as rate pause looms
Soon after beginning his second White House term a year ago, Trump launched a public pressure campaign pushing Powell and the Fed to lower interest rates, at various points threatening to fire or sue the Fed chair.
The president argued that dramatically lower rates were needed to reduce government borrowing costs and boost the housing market, but Fed policymakers resisted the pressure campaign.
Then in September, the 12 members of the rate-setting Federal Open Market Committee voted to cut the Fed’s benchmark interest rate, citing growing risks to the labor market. Two more cuts followed in October and December.
Trump eased back on his public attacks on Powell during the cutting cycle, but now the Fed appears poised to pump the brakes on further cuts when it next meets in late January.
Financial markets estimate a 95% probability that the FOMC will make no change to interest rates when the panel next votes on Jan. 28, leaving the overnight rate in its current range of 3.5% to 3.75%.
The economist Krimmel says that he doesn’t believe the threat of criminal prosecution will impact the FOMC’s decision later this month.
“The FOMC as a body must continue to be business-as-usual. Take in the data, weigh up both sides of its dual mandate and continue to communicate their judgments and reasoning to the American people,” says Krimmel.
“If monetary policy is to be seen as independent of politics, Powell’s top priority, then the FOMC must not and will not change any course.”
Developing story, more to follow.
