The Fed-Trump Conflict Reaches New Heights
President Trump's ongoing campaign to exert greater control over the Federal Reserve has taken a dramatic turn. Over the weekend, the Justice Department launched an investigation into Fed Chair Jerome Powell. This probe centers on testimony Powell gave to Congress last summer regarding the Fed's expensive headquarters renovation project in Washington.
What Sparked This Investigation?
Powell confirmed on Sunday that the Fed received subpoenas concerning his June testimony before the Senate Banking Committee. Lawmakers questioned him about the central bank's headquarters renovation, a massive project that has seen costs balloon from $1.9 billion in 2019 to as much as $2.5 billion today.
The Fed's main building dates back to the 1930s, with renovation plans approved nearly a decade ago. Trump and his allies have seized upon the project's duration and expense to argue that Powell has managed the central bank poorly. During his testimony, Powell defended the renovation against suggestions that the Fed was wasting money on indulgent features like VIP elevators and rooftop gardens.
He explained that swampy groundwater, asbestos, and soil contamination at the site caused delays and cost overruns. Interestingly, Trump's focus on the renovation seemed to fade after he visited the construction site with Powell in July. The two men wore matching hard hats while bickering about project costs. However, the Justice Department's criminal probe into Powell's testimony became public on Sunday night.
Powell's Forceful Response
In a strong statement issued Sunday, Powell suggested Trump's fixation on the construction project serves as a pretext for a deeper conflict. The real issue, according to Powell, involves Trump's longstanding demands for more aggressive interest rate cuts. Trump nominated Powell in 2017, but quickly regretted his choice when the Fed raised rates the following year. Trump argued those rate hikes could derail a strong business climate.
Former President Joe Biden reappointed Powell for another four-year term beginning in 2022. Trump renewed his attacks after returning to office in 2025, criticizing Powell for not cutting rates more aggressively. On social media, Trump has called Powell "stupid" and "angry," taunting him with the nickname "Too Late."
Why This Conflict Matters
Federal Reserve independence represents a crucial concern for financial markets. Investors rely on the Fed to make policy decisions based on economic reality rather than presidential political preferences. Many worry that presidents might favor cutting rates too aggressively, prioritizing economic growth over inflation control.
Such a stance could entrench elevated inflation in the economy, eventually requiring dramatic rate hikes to correct. Any attempt by Trump to fire Powell would face significant legal hurdles. Federal law protects Fed governors from arbitrary dismissal. A Supreme Court case scheduled for argument next week will likely establish ground rules for how aggressively the White House can manage the Fed's top ranks.
Markets showed relative calm on Monday, with some analysts attributing this to expectations that legal hurdles and Republican opposition will prevent Trump from dramatically reshaping the Fed. However, gold prices rallied and the dollar depreciated against foreign currencies, potentially signaling jitters about U.S. policy stability.
What Comes Next for Powell?
Powell's term as Fed chair ends in May. Trump is currently in the final stages of selecting a replacement, considering candidates including White House economic adviser Kevin Hassett, former Fed governor Kevin Warsh, current Fed governor Christopher Waller, and BlackRock investment manager Rick Rieder.
Even after Powell's time as chair expires, his term as an ordinary Fed governor extends until 2028. Most Fed chairs resign after their leadership term ends, but Powell hasn't indicated whether he will stay on. Any criminal charges that emerge could give Trump stronger legal grounds to remove Powell from the Fed entirely, creating another vacancy on the Fed's policy committee.
Potential Impact on the Federal Reserve
In his Sunday night statement, Powell pledged that the Fed will continue working apolitically during the investigation. Yet many Fed observers express concern about how this episode will affect the White House-Fed relationship moving forward.
Some interpret the investigation as a warning shot, signaling to potential nominees that consequences will follow any deviation from Trump's preference for drastically lower interest rates. This unprecedented conflict between the White House and the central bank raises fundamental questions about institutional independence and economic governance.
