The battle between President Trump and Federal Reserve Chair Jerome Powell took an odd turn over the weekend after the Department of Justice opened a criminal investigation into Powell.
The investigation is purportedly focused on the Fed's $2.5 billion renovation of its headquarters, but Chair Powell called out the move in a brief address last night, saying that it was motivated by the Fed's refusal to acquiesce to Trump's wishes to lower interest rates, saying, "setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of" President Trump remained the Fed's goal.
Image source: Getty Images.
What it means for investors
Powell's rebuttal was extraordinary and the first time he's directly called out the president for such behavior, despite press conference questions about comments Trump has made about Fed policy.
The investigations significantly ups the stakes here, but it's also a concern for Wall Street, as an independent central bank is generally considered a hallmark or a requirement of healthy financial system, and the threat of criminal charges against the top central banker significantly undermines that independence, especially at a time when Trump has already put plenty of verbal pressure on Powell and insulted him on social media.
The S&P 500 (^GSPC +0.16%) opened Monday morning down, but it seemed like investors generally took the news in stride as most major indexes were trading higher by the afternoon.
When asked for comment, Trump said he was unaware of the investigation.
What's next for the Fed
Chair Powell's term ends in May, so he won't be running the central bank for much longer. However, the DOJ threat has the potential to cause a crisis in replacing Powell, as Trump will name his replacement, who then must be confirmed by the Senate.
Republican Senators Thom Tillis and Lisa Murkowski said they would not confirm a Trump appointee as long as Powell is under investigation, and the issue is likely to roil markets if it metastasizes.
Powell was served with grand jury subpoenas, though it's unclear if the case will come before a grand jury to secure an indictment. If the case moves forward, it will go deeper into uncharted waters for both the government and the central banking system, which stewards the economy.
This isn't the kind of black swan event that will shock the kind of economy overnight, but it could erode trust in the economy and the stock market, weaken the U.S. dollar, and make the country less attractive to foreign investors.
There's a lot for investors to pay attention to here.
