Market Bulletin: The Department of Justice Launches a Criminal Investigation into Chair Jerome Powell; Impacts on Fed Independence and Financial Markets

Written By: Nate Garrison, CIO, World Investment Advisors; Anthony Silva, Senior Director of Strategy Management, World Investment Advisors

Key Takeaways:

1.  The Department Of Justice Opened A Criminal Investigation Into Federal Reserve Chair Jerome Powell

The Department of Justice launched a criminal probe into Chair Jerome Powell, focused on whether he misled Congress regarding cost overruns and evolving design plans for the Federal Reserve’s $2.5 billion headquarters renovation.

2.  Economists Warn: Powell Investigation Risks Undermining Fed Independence

Even though the investigation is an inquiry into Chairman Powell’s conduct and testimony, not monetary policy, Powell called the subpoenas a “pretext,” and economists warn that the tactic itself may risk eroding the Federal Reserve’s operational independence.

3. Supreme Court Challenge Threatens Legal Foundations Of Fed Independence

The situation is unfolding alongside a legal challenge in Trump v. Slaughter, which could weaken or overturn the long‑standing Humphrey’s Executor precedent that protects leaders of independent agencies from politically motivated removal. Weakening that precedent would expose Fed governors to removal based on policy disagreement, increasing volatility and uncertainty.

4. Legal Threats To Fed Autonomy Raise Tail Risks For Inflation, Rates, And Credibility

Central bank independence risks are rarely priced in immediately, but historically emerge gradually through higher inflation risk premia, steeper yield curves, and elevated long-term rates. If the Supreme Court scales back the Fed’s protections, future governors could be more vulnerable to removal over policy disagreements. If Fed independence weakens, it raises tail risks around inflation, real rates, and policy reliability.

5. Credibility Erosion Could Shift Foreign Capital Away From The Dollar And Toward Gold

A perceived erosion of the Fed’s credibility could encourage foreign investors who currently hold roughly one‑third of outstanding U.S. Treasurys to incrementally diversify away from the U.S. dollar and Treasury markets. Gold may benefit, as it historically acts as a hedge when confidence in monetary policy stability deteriorates.

More details and analysis follow below.

Investigation Announced; Powell Responds

The Department of Justice initiated a criminal investigation into Federal Reserve Chair Jerome Powell. The inquiry centers on whether Powell misled Congress during his June testimony regarding cost overruns and design changes associated with the Fed’s $2.5 billion headquarters renovation. In a short video released by the Federal Reserve soon after the news of the investigation broke, Powell maintained that plans evolved and that his testimony was accurate at the time.

The focus of the investigation is on whether Powell accurately described changes to the renovation project, including amenities that some lawmakers have characterized as excessive. Powell’s argument is not that the investigation lacks legal authority, but that it reflects an effort to apply leverage to monetary policy indirectly.

Potential Impacts On The Fed’s Independence

Since April, President Trump has publicly criticized Powell’s policy stance, at one point threatening his termination before walking the comment back days later. The rhetoric intensified after months of White House frustration with the pace of rate cuts, culminating in the DOJ probe.

Even though the investigation is an inquiry into Chairman Powell’s conduct and testimony, not monetary policy, Powell called the subpoenas a “pretext,”¹ and economists warn that the tactic itself may risk eroding the Federal Reserve’s operational independence.

Former Fed chairs Janet Yellen, Ben Bernanke, and Alan Greenspan signed statements calling the investigation an unprecedented prosecutorial assault on independence.²

Brief History Of The Fed’s Independence

The Federal Reserve has what economists call “instrument independence.” That means it can raise or cut interest rates, expand or shrink its balance sheet, and buy or sell Treasuries without political interference. Fed decisions do not require Presidential or Congressional approval.

What it does not have is “goal independence.” Congress sets the Fed’s objectives of price stability and maximum employment, and the central bank is tasked with executing policy in pursuit of those goals.³ The Fed also self-funds its own operations and does not rely on Congress for appropriations. This provides another layer of independence from political pressure.

The President has the authority to appoint members to the Federal Reserve board, with Congressional consent, but they do not have authority to remove members at their discretion. This limits the President’s direct influence on monetary policy. Central bank independence emerged as a response to counter the “political business cycle,” in which policymakers were tempted to prioritize short-term growth ahead of elections, even if it meant higher inflation later on. Empirical evidence across decades and countries is consistent: more independent central banks deliver lower, less volatile inflation without sacrificing growth or employment.⁴

In the U.S., this independence evolved over time. The Federal Reserve Act of 1913 created the system, but it was the 1951 Treasury-Fed Accord that ended the practice of pegging government bond yields. Subsequent reforms, such as the Banking Act of 1935 and the Humphrey-Hawkins Act of 1978, formalized the Fed’s dual mandate and congressional oversight, while preserving its instrument independence.⁵

Checks And Balances

Federal Reserve independence is reinforced by both law and design. Board governors serve long, 14-year terms that are staggered every two years, limiting the ability of any one administration to reshape the entire Board. Board members can also only be removed “for cause,” which the Supreme Court has defined as “inefficiency, neglect, or malfeasance.” That protection, upheld in Humphrey’s Executor in 1935, is designed to prevent dismissal over policy disagreements.⁶

The Fed is not a single-person institution. Monetary policy is set by the Federal Open Market Committee (FOMC), which consists of seven governors nominated by the President and confirmed by the Senate, along with five Reserve Bank presidents.

While Fed chairs are influential, they do not dictate outcomes or set monetary policy unilaterally. The FOMC structure creates an internal check that allows Fed chairs to be outvoted. The Fed chair is a permanent member of the FOMC and is responsible for setting the agenda for their meetings, but they have one vote equal to the other voting members of the FOMC. FOMC votes have historically been unanimous after the voters reach a consensus. This streak has frayed recently and may not be the norm going forward.

Other Recent Developments

The key difference in this second Trump administration is that the DOJ is arguing that the 1935 Humphrey’s Executor Supreme Court decision underpinning the Fed’s independence is unconstitutional because it improperly constrains the president’s executive authority.

That argument traces back to March, when President Donald Trump removed two Federal Trade Commission (FTC) commissioners from agencies explicitly designed to be insulated from the White House.

The issue is now before the Supreme Court in Trump v. Slaughter, which arises from the March 2025 removal of FTC Commissioner Rebecca Kelly Slaughter.⁷ A ruling for the government could narrow or overturn Humphrey’s Executor, calling into question the legal foundation of independent agencies.

If the Court eliminates “for cause” removal protections, the Fed’s independence would be fundamentally altered. While some foreign central banks operate without this precise legal protection and still maintain independence, the Fed’s autonomy would have to be reconstructed through other institutional means.

Since 1935, Humphrey’s Executor has allowed Congress to insulate regulators from political dismissal. Weakening that precedent would expose Fed governors to removal based on policy disagreement, increasing volatility and uncertainty.

How Does It Affect Markets?

The initial market response has been muted. Investors appear to view the investigation as noise rather than a catalyst for near-term policy change.

Historically, threats to central bank independence do not reprice overnight. They surface gradually through higher inflation risk premia, steeper yield curves, and elevated long-term rates. Political pressure can sometimes succeed in pushing short-term rates lower, but it often does so at the cost of higher volatility and diminished credibility. The lack of an immediate reaction does not mean the issue is immaterial; it likely means that markets are waiting to see whether this pressure continues.

Research from Goldman Sachs spanning more than 100 economies shows that political pressure to ease policy tends to raise 10-year rates by 20–30 basis points. This implies that public political pressure on central banks led the yield curve to steepen by around 30 basis points on average.⁸

The risks are well documented. President Nixon’s pressure on Fed Chair Arthur Burns ahead of the 1972 election kept monetary policy looser than fundamentals justified, and this contributed to the high inflation experienced during the decade that followed.⁹ There are also more extreme cases abroad, such as Turkey’s repeated dismissal of central bank governors contributing to lower economic confidence, a weaker currency, and destabilized markets.¹⁰

For the U.S., the implications could be felt through higher long-term rates, more volatile equities, and incremental pressure on the dollar. The Fed supports the dollar not only through price stability, but also by reinforcing its role as the global provider of liquidity in times of stress.

The dollar’s reserve status is unlikely to be under immediate threat. It is the currency of choice for most global transactions and the backbone of international capital markets. However, credibility matters. Persistent questions about policy reliability or political interference could encourage gradual diversification, particularly among foreign investors, who still hold roughly 30–35% of Treasurys outstanding.¹¹

Gold could be a big winner in all of this. Because gold is essentially a “credibility hedge” and a “safe haven” asset, if Fed independence weakens, it raises tail risks around inflation, real rates, and policy reliability. Gold is one of the cleanest hedges against that set of risks.

The WIA Investment Team will continue to monitor policy, markets, and the economy, and provide you updates and our analysis in the weeks and months to come.

For assistance with your workplace retirement plan, please schedule a call with the SMARTMap Financial Advocate team here. 

Sources:
1. “Statement from Federal Reserve Chair Jerome H. Powell” Board of Governors of the Federal Reserve System, January 11, 2026, https://www.federalreserve.gov/newsevents/speech/powell20260111a.htm
2. “Past three Fed chairs decry ‘unprecedented’ assault by Trump on Powell,” Reuters, January 12, 2026, https://www.reuters.com/world/us/past-three-fed-chairs-decry-unprecedented-assault-by-trump-powell-2026-01-12/
3. “What is Central Bank Independence” American Institute for Economic Research, Alexander W. Salter, June 19, 2025, https://aier.org/article/what-is-central-bank-independence/
4. “Why Central Bank Independence Matters” World Bank Group, Mahama Samir Bandaogo, November 30,2021, https://documents1.worldbank.org/curated/en/284641638334557462/pdf/Why-Central-Bank-Independence-Matters.pdf
5. “Overview: The History of the Federal Reserve” Federal Reserve History, David C. Wheelock, https://www.federalreservehistory.org/essays/federal-reserve-history
6. “The Fed Explained” Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/aboutthefed/the-fed-explained.htm
7. “Donald J. Trump, President of the United States, et al., Petitioners v. Rebecca Kelly Slaughter, et al.” United States Court of Appeals for the District of Columbia Circuit, https://www.supremecourt.gov/docket/docketfiles/html/public/25-332.html
8. “Fed Independence: How Concerning?” Goldman Sachs Top of Mind Research, Issue 139, May 19, 2025, https://www.goldmansachs.com/insights/top-of-mind/fed-independence-how-concerning
9. "How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes” Journal of Economic Perspectives – Volume 20, Number 4, Burton A Abrams, https://fraser.stlouisfed.org/files/docs/meltzer/jep_2006_abrams_how_richard_nixon.pdf
10. “Turkey’s Erdogan Fires Central Bank Officials, Fueling Economic Uncertainty” The Wall Street Journal, Jared Malsin and Anna Hirtenstein, October 14, 2021, https://www.wsj.com/economy/central-banking/turkeys-erdogan-fires-central-bank-officials-fueling-economic-uncertainty-11634209321?gaa_at=eafs&gaa_n=AWEtsqcAYK_06_kuqF0mQntVgGGyjC4-t5HKXU5WvQcv19W5SIE34v9FBmvI&gaa_ts=6967e14d&gaa_sig=gQNjjO7BcwWocnbzWRqXrI-AgCBS9v7lzUF4Jv6eoH3yAcTRWfC1wrGkoQmuyH0yhEp0Z6z7jiQ2BPP2E6Rt-A%3D%3D
11. “Fed Independence: How Concerning?” Goldman Sachs Top of Mind Research, Issue 139, May 19, 2025, https://www.goldmansachs.com/insights/top-of-mind/fed-independence-how-concerning