The political struggle between Federal Reserve independence and the White House has entered a critical phase. The Justice Department's investigation into Chairman Powell and the Supreme Court's impending hearing on the removal of a Fed governor are becoming intertwined, potentially evolving into a prolonged constitutional stalemate. Markets fear the bedrock of U.S. monetary policy is being shaken and are cautiously assessing the profound impact of this unprecedented crisis on the interest rate path and asset prices.
The Cook hearing is shaping up to be a crucial preliminary battle. As the U.S. Department of Justice's investigation into the Federal Reserve continues, the Fed's fight to maintain political independence will extend to the Supreme Court.
On January 21st, the Supreme Court will hear arguments regarding former President Trump's attempt to remove Federal Reserve Governor Lisa Cook. Government officials last year accused Cook of fraud for allegedly misstating her primary residence on mortgage applications; Trump tried to fire her but was blocked by the courts. A White House victory could set a significant precedent for the current administration's attempts to remove Fed Chair Powell.
Aditya Bhave, an economist at Bank of America, noted in a report: "An unfavorable Supreme Court ruling for Cook would substantially increase the likelihood of Powell being removed due to the Justice Department investigation. We have consistently argued that the Cook case is more critical for the policy outlook than the choice of the next chair, and the current situation particularly validates this view."
This Fed turmoil escalated after Powell announced last Sunday that he had received a subpoena from the Justice Department concerning a controversial multi-hundred-million-dollar renovation project at the Fed's headquarters. The investigation is reportedly focused on whether Powell made false statements about the project during his congressional testimony last year.
Trump has been a fierce critic of Powell and considered removing him last year. Powell maintains that Trump lacks the authority to fire him, but the situation could change if the President can establish grounds for removal.
On the surface, the move to oust Powell seems of limited significance: his term as Chair ends in May, at which point Trump could freely nominate a new Chair. However, Powell's term as a Federal Reserve Governor extends until 2028, meaning he could remain on the Board and potentially obstruct Trump's demands for "substantial" interest rate cuts—a point Trump emphasized in a social media post on Tuesday.
Conversely, this could also further incentivize Powell to serve out his full term as Governor, using it as a bulwark against Trump's attempts to undermine Fed independence. Powell has largely refrained from commenting in the face of Trump's sometimes sharp personal attacks. While previous presidents have tried to pressure the Fed into easing policy, Trump is unique in his public intensity and aggressive posture. More significantly, this marks the first time the Justice Department has launched an investigative pursuit of a sitting Fed Chair.
Multiple analysts point out that the current situation could evolve into a protracted battle, with Powell potentially deciding to remain on the Board.
Deutsche Bank draws a parallel between Powell and former Fed Chair Marriner Eccles—after whom the current Fed building is named. After being removed as Chair by President Truman in 1948, Eccles chose to remain on the Federal Reserve Board until 1951, steadfastly supporting Fed independence throughout.
More notably, there could even be resistance within the Fed's rate-setting Federal Open Market Committee (FOMC) to support Powell retaining the Chairmanship, even if Trump nominates someone else for the role.
Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, stated in a client note: "While this has never been the base case and previously seemed low probability, events over the weekend likely increased the odds that Powell chooses to remain at the Fed. In fact, if the administration persists with a criminal case against Chair Powell and Senate Republicans firmly refuse to advance nominations for Fed governors, the FOMC would likely opt to keep Powell as Chair."
This brings the focus back to the Cook case hearing.
If Trump prevails, he could use it as grounds to remove Powell. If Cook wins, it signals a prolonged war of attrition between the Fed and the White House, with significant implications for the policy trajectory.
Markets are closely watching for clues on the Fed's next moves. Traders widely expect no action at the policy meeting later this month. Data from CME Group indicates the market now expects the next rate cut to be delayed until June.
Kevin Gordon, Director of Macro Research and Strategy at Charles Schwab, noted: "The outcome of the Cook case will have a major impact on any president's ability to shape the Fed's structure. But it must be clear: although the magnitude of market reactions to Powell-related news has been limited across asset classes, the directional moves—dollar consolidation, equity declines, bond market declines—clearly show how markets would digest such shocks if they were to persist over the longer term."
Comments