Trump's Fed Fallout

Three ways the DOJ's investigation of the Fed will threaten Trump's desire for lower interest rates

Over the weekend, Fed Chair Jerome Powell revealed in an extraordinary video that the Department of Justice had served the Fed with a grand jury subpoena. Powell claimed the subpoena threatened a criminal indictment for purportedly lying to Congress in testimony he had given in June 2025 about the cost of renovating the Fed’s headquarters. In the video, Powell characterized the investigation as a politically motivated attempt to undermine the Fed’s independence, asserting that the subpoenas were “pretext” for pressure to lower interest rates.

On Monday night, I joined MS NOW to talk about the video and its fallout:

You can only cover so much in a seven minute cable news segment, so I want to expand on my thoughts here. Trump desperately wants lower interest rates and more control over the Fed’s process of conducting monetary policy. DOJ’s decision to subpoena Powell (whether explicitly blessed by Trump or tacitly encouraged by him after months of sustained attacks on Powell) will undermine his goals in three ways:

• It will now be harder for Trump to get his preferred nominee for Fed Chair confirmed

The irony of the attacks on Chair Powell is that Powell has delivered three consecutive interest rate cuts—despite mixed evidence to support them—and only has five more months in his term as Chair. Trump could have pocketed the cuts, nominated someone for Fed Chair that he felt confident would advocate for the further rate cuts he wants, and likely gotten a straightforward confirmation from the Republican Senate by the summer.

The DOJ investigation has weakened Trump’s hand. Republican Senator Thom Tillis condemned the investigation into Powell and said he would block all of Trump’s Fed nominees until the legal matter is resolved. That’s particularly important because Tillis sits on the Senate Banking Committee, which is responsible for conducting a hearing with Trump’s Fed nominee and voting to approve the nominee as a precursor to the nominee receiving a vote from the full Senate. With a one-vote Republican margin in the Banking Committee, Tillis’ opposition in Committee means a Trump nominee could not be approved as of now.

Even if the criminal investigation is wrapped up quickly and Tillis’ blockade ends, the DOJ’s attack is likely to bring heightened scrutiny to Trump’s Fed Chair pick. Powell has deep support in Congress. Several other Republican Senators have expressed concern about the DOJ subpoena. This incident may have raised their standards for the Fed Chair nominee. Betting on Republican members of Congress to stand up to Trump is usually a bad idea, but this may be an instance where they show some backbone and push back on a Fed Chair nominee they feel is insufficiently committed to independence from the White House. That could particularly threaten the confirmation of someone like Kevin Hassett—who serves as Trump’s top economic advisor in the White House and is a leading contender for the Fed Chair position.

• It will now be harder for a Trump pick for Fed Chair to actually deliver the lower interest rates Trump wants

Even if Trump gets his preferred nominee for Fed Chair confirmed, this incident will make it harder for that new Chair to deliver rate cuts.

The Fed Chair does not set interest rates alone. They lead the Federal Open Market Committee, a 12-member group made up of the seven members of the Board of Governors of the Fed and a rotating set of five presidents of the regional Federal Reserve banks. The FOMC sets rates by majority vote, and the Chair is only one of those votes.

Historically, the Fed Chair exercised enormous influence over the FOMC’s decisions, and there were rarely any dissents from the 12-member committee. That has started to shift recently. There have been more dissents on rate-setting decisions in the last several FOMC meetings, with some members advocating for deeper rate cuts and other arguing against rate cuts entirely.

Trump’s Fed Chair pick was always going to be viewed with some suspicion by other FOMC members given Trump’s overheated calls for lower interest rates, but this latest incident is likely to create even more internal opposition within the Committee. If Trump’s pick argues for deeper and faster rate cuts, even in the face of inflation that is stubbornly above the Fed’s 2% target, the Committee members may not be willing to follow the new Chair’s lead. That’s particularly the case if my third point below comes to pass.

• After this most recent incident, Powell is more likely to stay on the FOMC as a regular member even after this term as Chair ends

Powell’s term as Fed Chair ends in May, but his term as a regular member of the Fed Board doesn’t end until January 2028. (The term for Fed Board members is 13 years, while the term for Fed Chairs in only four years, so the terms don’t necessarily end at the same time.) Historically, Fed Chairs have chosen to leave the Fed Board when their time as Chair ends—even if their Board term is not up—creating a new vacancy on the Fed Board for the President to fill. But given Trump’s attacks on the Fed, Powell could choose to stay on after his term ends to serve as a counterweight to Trump’s Fed Chair and to deprive Trump of the ability to nominate another person to the Board. Indeed, since the DOJ subpoena, the odds of Powell serving out his full term have risen sharply in online betting markets.

This would be a disastrous outcome from Trump. Powell would command great authority in FOMC discussions about interest rates. He would have far more credibility with other FOMC members than Trump’s new Chair. And because the Chair’s authority largely comes from soft power rather than any formal authority over rate-setting decisions, Powell could assert de facto control over interest rates for the next two years.

I think this is still unlikely to happen. It would mark a sharp break from past precedent and practice for a Fed Chair to stay on, and Powell is 72 and has had a strenuous job for the past eight years. But he seems to legitimately care about the Fed as an institution, and his decision to go public with a direct-to-camera video about the DOJ subpoena suggests a new level of outrage about attempts to influence the Fed’s monetary policy decisions. It would be bitterly ironic for Trump if the net effect of his sustained attacks on Powell is allowing Powell to exercise control over interest rates for two additional years.