Federal Reserve Chair Jerome Powell may be entering the final weeks of his leadership at the central bank. Following a decision by the Justice Department on Friday, he now faces a choice: whether to remain at the institution in a different capacity.
US Attorney Jeannie Pirro announced on social media that she was referring a criminal investigation concerning renovations at the Fed's headquarters to the central bank's internal inspector general. This move effectively suspends the Justice Department's involvement in the probe for now.
While this action appears significant on the surface, what matters more is that Powell had previously vowed to stay in his role until the criminal investigation was resolved. Now that a decision has been made, he must decide whether to follow historical precedent and leave the Fed entirely—as most former chairs have done—or remain to complete the final two years of his term as a member of the Board of Governors.
This decision could significantly impact policymaking at a particularly delicate time.
Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI, stated in a report, "Powell has been tight-lipped. Had this investigation not occurred, we believe he would have left the Fed entirely on May 15. However, we think the Justice Department's move may have come too late—and the threat of the investigation restarting is too uncertain—for Powell to depart on May 15."
Guha suggested that Powell might instead choose to remain for some time, even if he does not serve the full remainder of his board term, which expires in January 2028.
Former President Donald Trump had threatened to fire Powell if he did not leave voluntarily after his term as chair concluded.
Central Issue
The core of the matter involves the threat to the Fed's privilege of operating free from political interference. Trump was more vocal than any of his predecessors in criticizing the Fed, demanding lower interest rates while threatening to dismiss Powell and actively seeking to remove Governor Lisa Cook.
Powell's designated successor, Kevin Warsh, who has been criticized by some congressional Democrats as a Trump loyalist, could further undermine the Fed's perceived independence. Warsh held confirmation hearings this week, but Republican Senator Thom Tillis of North Carolina had previously vowed to delay a committee vote until the criminal investigation was completed.
Guha noted, "Our sense is that Powell will stay on for a few months as a regular Fed governor to avoid creating the impression of a de facto plea deal or a pressured departure. Warsh's provocative comments about a 'regime change' at the Fed also increase the likelihood that Powell stays for a period to protect the institution and its staff."
A Fed spokesperson declined to comment on Powell's plans.
If Powell leaves now, it would provide Trump an opportunity to appoint another member to the Board. Including Warsh, the president would have three appointees on the seven-person board, including Governors Christopher Waller and Michelle Bowman from his first term.
Markets Are Watching
Although a majority vote from the Federal Open Market Committee is required to change interest rates, a majority on the Board of Governors does hold limited influence over policy and personnel decisions.
Meanwhile, if investors perceive the committee as politically compromised, they may view potential interest rate cuts negatively.
However, David Zervos, Chief Market Strategist at Jefferies, stated last Friday that he believes Wall Street would react positively if Powell were to leave now. Zervos himself was interviewed for the Fed chair position but was not selected as a finalist.
Zervos said in an interview, "If Jay issues a statement saying he will leave when his chair term ends, it would actually boost the market and make the interest rate market more positive, meaning lower yields and higher prices. That impact would be greater than the lawsuit being dropped."
Powell is scheduled to hold a regular press conference next Wednesday following the FOMC meeting, where he may have an opportunity to address the matter.
Although Powell has remained silent about his intentions so far, markets will be closely watching for any developments, alongside the Senate's progress on confirming Warsh. The incoming chair has indicated a preference for lowering interest rates and reconsidering other aspects of the Fed's operations.
Zervos added, "Kevin's position will carry significant influence. He could change how many things are handled at the negotiating table."
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