Jay Powell isn't enough to save the Fed

Another week, another attack on the Federal Reserve from the Trump administration. On the surface, we could score this one to the Fed for its standing up to political intimidation, but the linchpin of the defense — Jay Powell — is out as Fed Chair in a matter of months, and there’s no sign that the President will ease up on the Fed.

The attack was historic. The Department of Justice opened a criminal investigation related to the $2.5 billion renovation of the Fed headquarters and Fed Chair Powell’s related Congressional testimony last year. The Fed’s response was historic, too. Sunday night, Powell issued a public statement, calling the renovation a “pretext” and the investigation an “unprecedented action [that] should be seen in the broader context of the administration's threats and ongoing pressure.”

Watch the 2-minute video. It’s a masterclass of what Fedspeak is not: direct, clear, and brief. He didn’t say “Fed independence” once; he laid out the stakes in plain terms:

This is about whether the Fed will be able to continue setting interest rates based on evidence and economic conditions—or whether monetary policy will instead be directed by political pressure or intimidation.

Powell said what outsiders have been saying for several months: the Fed is under attack. The outpouring of support from many members of Congress, including some key Republican Senators, all living former Federal Reserve Chairs, central bankers around the world, some CEOS, and meme-stock traders was swift and clear.

The reaction in financial markets was muted (again), likely reflecting the outpouring of support (and a lack of imagination). The President kept hurling insults at Powell but distanced himself from the criminal investigation. Powell’s stand looks savvy and a win for the Fed, at least for now. I agree, but I am deeply worried.

I am uncomfortable with how much this week’s apparent Fed win hinges on Jay Powell being the target of the administration’s attack. Today’s post discusses the key factors to his successful stand. However, Powell’s term as Chair ends in four months, so ‘being Jay Powell’ won’t be a sufficient guardrail for the Fed for long.

Bi-partisan support in Congress.

In taking a stand, Powell used his decades of bipartisan credibility in Washington, D.C.—a kind of credibility that basically doesn’t exist anymore. Powell is a lifelong Republican. He served at the Treasury in the H.W. Bush administration. Obama nominated him to the Federal Reserve Board as a Governor in 2012. He is the last of the across-party Governor nominations, which were once fairly common at the Fed. Trump elevated him to Chair in 2018, and Biden renominated him in 2021. No one else at the Board or at the Reserve Banks comes close to that pedigree.

Powell’s support from Congressional Republicans this week was critical. Senator Tillis, who serves on the Senate Banking Committee, quickly issued a statement in support and threatened to block any Fed nominations, including for the new Chair, until the legal matter against Powell is resolved. Senator Kennedy, another member of that key committee, said, “We need this [investigation of the Powell] like we need a hole in the head.” Representative Hill, the Chair of the House Financial Services Committee, as with many others, defended Powell’s character: “I know Mr. Powell to be a man of integrity with a strong commitment to public service.” While not universal, the breadth of the Congressional support for Powell this week, even among some members close to the President, should be sufficient to keep him safe in his job. The Department of Justice has not closed their inquiry, but the worst outcomes for Powell look unlikely. The worst outcomes for the Fed are not off the table.

No one else at the Fed has connections like Powell’s. Fed Governor Lisa Cook, who was narrowly confirmed as a Biden nominee in 2021, did not have decades of experience working with lawmakers on both sides of the aisle to lean on. Last summer, President Trump tried to remove her on unproven claims of mortgage fraud. Cook’s legal case is ongoing, and the Supreme Court will hear oral arguments next week. The outcome of Cook’s case will tell us more about the President’s ability to pack the Fed Board with loyalists than the outcome of Powell’s stand. If the Supreme Court doesn’t strengthen the Fed’s removal protections, this week will only be a delay, not a defeat of the President’s efforts to control interest rates.

Personal wealth to fund a legal defense.

It’s been clear for years that Trump wants Powell to go. Opening a criminal investigation is the latest, most aggressive effort to push Powell out. As before, it’s not working, and Powell 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.

Powell will fight any charges, and he’s not going anywhere. Note, the Senate confirmed him as the Fed Chair (until May) and a Fed Governor (until 2028). It is highly unusual for someone to stay after their Chair term expires; we are in highly unusual times. It would be a setback for the White House if Powell stays, but there will almost certainly be a new Chair soon.

Standing firm can be costly. In criminal investigations, the Fed’s legal staff cannot represent Powell. He has to hire his own legal defense. Powell’s net worth is estimated to be $20 to $55 million. He can afford the legal fees. Most public servants cannot. Even the threat of lawsuits could lead people to resign or discourage them from entering public service. Being independently wealthy should not be a prerequisite for being an independently-minded Fed official, but it might be in this administration.

The Trump Administration’s use of the legal system to intimidate public servants has not been limited to the Fed. The Department of Justice has opened a series of cases against the President’s enemies. It’s a pattern that, if left unchecked, could cause great harm to our country. Powell’s standing firm is important, but it’s not a lasting check. Nothing about this week should make us optimistic that legal intimidation will stop.

Not a Trump loyalist.

It may seem obvious, but Powell’s stand this week hinged on his not being a Trump loyalist. Under Powell’s leadership, the Fed has resisted the President’s pressure for ultra-low interest rates, but Powell’s leadership is near its end. The next Fed Chair faces an impossible task: be loyal enough to get Trump’s nomination, but independent enough to win Senate confirmation and the respect of other Fed officials.

There is good reason to worry that a Trump loyalist as Chair would strong-arm the committee into much lower interest rates than economic conditions warrant, but we should also consider what happens if Trump’s Fed Chair is outvoted on the committee and can’t deliver on the promised cuts. We could be on the verge of a revolving door of Trump Fed Chairs, each less credible and less effective than the last.

Trump is only considering people who agree with him that interest rates should be much lower. Suppose the new Fed Chair starts in May, then spends months arguing for sharply lower rates, shaking up staffing and internal practices, and using the Fed’s bully pulpit to reinforce White House’s upbeat messaging on the economy. But he falls short of the votes necessary for big rate cuts. Against the backdrop of the mid-term election, the Fed and its Chair will be a bigger target for White House retribution.

Does Congress rally behind Trump’s loyalist Fed Chair when he’s attacked by the White House? Do central bankers around the world stand up against his sacking? The next Fed Chair will not be Jay Powell. He will not be someone who starts out as credibly independent. The next Fed Chair will have to prove that he is independent. That is not going to go over well with the President. Also, someone loyal enough to get Trump’s nomination might simply leave if the President demands it. The Chair is not the Fed, but a weak Chair would weaken the Fed.

A revolving door of Chairs would be bad. The Internal Revenue Service cycled through seven different individuals serving as commissioner or acting commissioner during 2025. Each successive cycle of Fed Chair picks would likely be more political and less qualified. What independent-minded, competent person would sign up for the abuse? Powell effectively stood up to the administration this week; the chances that the next Fed Chair can or will are much lower. It is imperative that the Senate not confirm a loyalist to Fed Chair.

In closing

The escalation of political pressure on the Fed is deeply troubling. Powell met the moment forcefully, putting his decades of credibility and personal resources on the line. But his time as Fed Chair ends in four months. The Supreme Court must strengthen the removal protections of Fed officials. The Senate must reject Fed nominees who are closely aligned with the President. The stakes for people’s economic lives are too high to be complacent.