As the Trump-Fed Battle Heats Up, Some Experts Worry About What Could Be Next

President Donald Trump has long complained that interest rates are too high. Experts say his pressure campaign against the Federal Reserve isn’t helping him.

While Trump and Powell have have a bumpy public relationship, this weekend’s affairs—Fed Chair Jerome Powell said the Justice Department had opened a criminal investigation into whether he lied to Congress while testifying last year on the costs of renovating Federal Reserve headquarters—marked an escalation. Powell called the investigation politically motivated and “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.”

The administration has sought to pressure the Fed, which operates independently of the White House, to aggressively lower interest rates. Policymakers gradually cut rates last year to support a weakening labor market, but have rebuffed calls to move faster, worried it might fuel inflation. Most Fed watchers expect some cuts this year, though not as many as Trump might prefer.

Market measures of inflation expectations inched higher this week, but didn’t jump, suggesting investors don’t see the investigation having a major effect on rates. That cool has alarmed some observers: Former Fed Chair and Treasury Secretary Janet Yellen on Monday morning told CNBC she was “surprised the market isn’t more concerned.”

Meanwhile, the outcome of the probe remains an open question, with several experts wondering if it might have an effect opposite to what Trump would likely prefer.

“The criminal investigation into Federal Reserve Chair Jerome Powell is unlikely to influence the path for monetary policy, and could even backfire by making officials more reluctant to cut rates in the coming months and years,” wrote Bernard Yaros, lead U.S. economist at Oxford Economics, on Monday. 

JPMorgan Chase CEO Jamie Dimon on Tuesday said “anything [that] chips away at [Fed independence] is probably not a great idea, and in my view, will have the reverse consequences. It’ll raise inflation expectations and probably increase [interest] rates over time,” said Dimon. (Trump in response called Dimon “wrong.”)

All three living former Fed chairs are among 14 policymakers spanning the political spectrum who signed onto a statement warning the loss of central bank independence would undermine faith in U.S. monetary policy, upending the domestic and global financial systems.

“This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly,” the statement read. “It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.”

Many experts believe the investigation has increased the odds that Powell stays on as a Fed governor after this term as chair ends in May. (Governors serve 14-year terms, while chairs serve for four years. Fed chairs are, by law, always Fed governors, and are allowed to remain governors after their tenure as chair ends.) On prediction market Kalshi, the perceived odds of Powell leaving the Fed before August plummeted on Sunday; they have since recovered to about 66%.

“By remaining on the Board, Powell would limit the scope to which the president could reshape the central bank’s composition, as the new chair would instead have to take current Fed Governor Stephen Miran’s seat,” according to Yaros. Trump appointed Miran, a White House advisor closely aligned with the president, last year to complete the term of Governor Ariana Kugler, who resigned. Kugler’s term ends on Jan. 31. 

Investors could also be a check against politics influencing monetary policy, says Yaros. In the short-term, any loss of Fed credibility could spark a Treasury sell-off, causing yields, which influence an array of consumer and commercial interest rates, to skyrocket. (Bond yields have ticked lower this week.)

In the long term, economic models suggest politically motivated rate cuts would juice economic growth, but also stoke inflation and cause market-based interest rates to rise, “leaving a future Fed with no good options to return inflation back to target,” says Yaros.

Yaros expects an upcoming Supreme Court decision to be more meaningful for the Fed’s independence than the Powell matter. The court will next week hear oral arguments to determine if Trump has the authority to remove Fed Governor Lisa Cook, whom he attempted to fire last year over disputed allegations of mortgage fraud. 

“A ruling against Cook would open the door for current and future administrations to stack the central bank,” said Yaros.