The renovation of the Federal Reserve's two buildings has proven exorbitantly costly—so costly that it has thrust the central bank chairman into the spotlight of a criminal investigation. Over the past year, media coverage of the Fed headquarters' refurbishment has read like a luxury home inspection: budgets ballooning, details scrutinized repeatedly. During congressional hearings, Powell faced persistent questioning over the specifics of the project. Such scenarios are hardly rare in Washington: government projects, cost overruns, and political bickering follow a well-worn script. The plot took a sharp turn from audit reports to political thriller only when a "subpoena" entered the scene. According to reports from outlets like Reuters, the Department of Justice served a grand jury subpoena to the Fed, initiating a criminal investigation centered on Powell's testimony before the Senate Banking Committee in June of last year. The core issue: whether he made misleading statements to Congress regarding the cost overruns and scale of the renovation project. Adding to the drama, Powell departed from his usual practice of keeping emotions in check. He issued a statement on the Fed’s official website (accompanied by a public video), opening with a clear declaration: the DOJ served the subpoena on a Friday, threatening criminal charges against him. He then delivered a stark message: the renovation and hearings were merely a "pretext"; the real aim was to use criminal pressure to force the Fed to set interest rates according to political preferences. His final remark seemed directed at all officials: public service sometimes requires "holding one's ground." It is rare for a Fed chair to openly use the term "political threat." Doing so signals that the unspoken understanding—where everyone pretends to stick to their respective roles—is beginning to fray. This also explains why the market's initial reaction wasn't to debate "whether the renovation was worth it," but rather to seek safety havens: upon the news, the dollar weakened, gold strengthened, and stock index futures declined. Viewing this solely as "Powell's personal trouble" would mean missing the bigger picture: When the Fed refuses to cooperate, the White House's strategy has shifted from contesting the "federal funds rate" to pursuing alternative avenues: using shadow QE to suppress mortgage rates, imposing credit card price caps to lower bills, and leveraging investigations and tenure boundaries to pressure individuals—ultimately aiming for a functional takeover of monetary policy. Why now? Political survival is the fundamental driver; economic narratives are merely tools. The year 2026 marks the U.S. midterm elections. For most presidents, midterms determine how manageable the latter half of their term will be; for Trump, it feels more like a matter of political survival. In recent party remarks, Trump bluntly warned: if Republicans lose Congress, "they will impeach me." This may not be a precise legal forecast, but it accurately describes the political fallout: if control of Congress changes hands, investigations, subpoenas, and hearings could flow like an open tap, dragging the White House agenda into endless battles of attrition. Simultaneously, pressure on approval ratings is very real. Multiple media outlets cite Reuters/Ipsos polls indicating Trump's approval rating hovers around 40%. The combination of electoral pressure and congressional risk dictates that the White House's priority this year isn't "producing a perfect macroeconomic policy report," but rather "making voters feel their lives are improving." Consequently, the economic narrative converges on one word: affordability. But in an election context, affordability isn't an abstract academic concept; it translates directly to two monthly bills:
Mortgage Payments: Whether one can afford to buy or upgrade a home boils down to whether the monthly payment is manageable. Credit Card APR: When bills accumulate, APR isn't just financial jargon; it represents real-life financial stress.
These two factors are far more tangible to voters than the "federal funds rate." Voters don't scrutinize the dot plot; they scrutinize their bills. Therefore, when the Fed is unwilling to cut rates rapidly according to a political timetable, the White House's next move becomes logical: if it can't change the "policy rate," it will attempt to change the "interest rate endpoints that voters actually feel." First Front: Targeting Individuals—Not Necessarily to Remove Anyone, But to Raise the Cost of "Upholding Independence" A common misinterpretation is that the White House's goal is simply to oust Powell. A more realistic objective might be to make all central bank officials understand that non-compliance carries greater risks. Why did Powell respond with such unusual firmness this time? Because this isn't merely "the president criticizing you on social media"; it's "the justice system serving you a subpoena." His statement contained three crucial details:
Timing: He explicitly stated the DOJ served the grand jury subpoena on a "Friday." Direction: He directly linked the "threat of criminal charges" to the Fed's evidence-based interest rate setting, implying the action punishes the Fed for not cutting rates according to presidential preference. Characterization: He labeled the renovation and hearings a "pretext," framing such actions within a context of "sustained pressure."
Together, these statements announce to the world that central bank independence is no longer an academic discussion but a real-world conflict. This can be seen as an "institutional thermometer"—when the central bank chair starts publicly discussing "threats," the temperature is clearly rising. The Lisa Cook Case: Testing Boundaries at the Supreme Court. Simultaneously, another signal is clear: the Supreme Court is scheduled to hear oral arguments on January 21, 2026, regarding Trump's attempt to remove Fed Governor Lisa Cook from her position. Superficially, this case is about "whether a specific governor can be removed for cause," but at a deeper level, it questions: How "special" is the Fed? How far can the president's reach extend? Considering Powell's criminal investigation alongside the Cook case leads to the same conclusion: the White House is not engaging in isolated strikes but is actively working to undermine the certainty of "tenure protections." Once tenure protections become uncertain, policymaking becomes more "cautious"—not cautious based on data, but cautious to avoid conflict. This is the real effect of "targeting individuals": it might not change interest rates immediately, but it alters the future dynamics of policy博弈. Second Front: Targeting Markets—If You Can't Adjust the Policy Rate, Adjust "Monthly Payments" and "Bills" If targeting individuals is about "making the driver hesitant to resist," targeting markets is about "directly modifying the transmission system." The White House's recent two-pronged approach bypasses the federal funds rate entirely, aiming straight for voters' pain points: (1) Mortgages: A $200 Billion "Shadow QE" Aimed at Lowering Mortgage Costs Trump has directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities (MBS) to lower housing borrowing costs; Treasury Secretary Bessant's explanation was more direct: this purchase plan is intended to roughly offset the Fed's monthly MBS runoff of about $15 billion. In plain terms: The Fed is reducing its balance sheet, creating a demand gap for MBS that could widen mortgage spreads; the strategy is to deploy a "quasi-official buyer" to fill that gap, thereby narrowing spreads and pushing mortgage rates down. This requires neither immediate Fed rate cuts nor changes in law. It simply leverages the readily available policy tool of the "GSEs" (Government-Sponsored Enterprises). Politically, this move is highly effective:
Technically, it's a "market transaction," less conspicuous than an executive order. In terms of outcome, it targets what voters care about most: monthly payments.
It's not the Fed's QE, but it performs part of QE's function: using public power to influence financial conditions. (2) Credit Cards: A 10% Cap, Turning APR into a Campaign Slogan The other move is even more direct: Trump has called for a one-year "10% cap on credit card interest rates" starting January 20, 2026. Why is this so potent? Because credit card rates are the "easiest interest rates to get angry about." Widely cited data shows the average U.S. credit card APR fluctuates around 19%-21%. Against this backdrop, a "10% cap" sounds like cutting the pain in half—one doesn't need financial expertise to immediately form an emotional judgment: why is it so expensive? Whether it's feasible or how it would be implemented are secondary questions; for the White House, the primary value is already achieved: shifting blame for "high rates" from the Fed to credit card companies, and redefining "rate cuts" from policy rates to bill rates. This is the core logic of targeting markets: If you won't cooperate on lowering the policy rate, I'll work on the endpoint rates, allowing voters to see "I'm lowering costs." Combining the Two Fronts: This is What "Functional Takeover" Looks Like At this point, the concept of "functional takeover" becomes clear:
Targeting Individuals: Increasing the political/legal cost for central bank officials who insist on independence. Targeting Markets: Leaving the source of the policy rate untouched, but using "GSE MBS purchases + credit card price caps" to influence the interest rate endpoints experienced by voters.
The combined effect creates a tangible reality: Even if the Fed is slow to act, the White House can take action on the "rates voters feel most acutely," creating a perception of falling costs. For midterm elections, this is an incredibly attractive toolkit. The problem is: once politically effective, it risks being replicated. The first time, one might say "this is an exception." The second time, "it's an election year." By the third time, markets may start to assume: politics can influence pricing. Once this assumption takes hold, financial markets will respond in their characteristic way—pricing this uncertainty into asset values. The Real Risk: Short-Term Cost Cuts are Tempting, But "Opening the Floodgates" is More Dangerous Let's be blunt: there's nothing wrong with lowering costs itself. It's a perfectly legitimate desire for ordinary people to want lower mortgage payments and credit card bills. The true danger lies not in "how much is lowered," but in "how it's lowered." When a government starts using administrative measures to define "reasonable" ranges for certain interest rates, the long-term problem it creates is typically not moral, but systemic:
Markets will begin to worry: when the next political pressure arises, will other interest rates be targeted next? Institutions will worry: will pricing rules change with the political cycle? Investors will worry: are the boundaries between law, regulation, and the central bank still stable?
These concerns might not trigger an immediate crisis, but they quietly increase something called: risk premium. In simple terms: because the rules have become uncertain, investors demand higher returns as compensation. This leads to a common paradox: Using administrative force to suppress rates in one area may cause the system to exact a price elsewhere—through higher volatility, increased long-term funding costs, or more fragile market sentiment. This is also why Powell responded with such unusual firmness: he isn't just fighting for personal vindication, but for a fundamental boundary. Lowering costs might constitute a political victory, but the "migration of pricing power" carries a systemic cost. Let's bring the story full circle. The White House's suite of actions—shadow QE to suppress mortgages, credit card caps to lower bills, testing legal and tenure boundaries to pressure individuals—collectively aim for one goal: to improve voters' perception of "cost of living" as quickly as possible before the midterm elections. This motivation is understandable, and it might even prove effective in the short term. However, what warrants vigilance is not the decline in interest rates per se, but the migration of interest rate "pricing power": As interest rates are increasingly defined by political needs within "reasonable ranges," markets will increasingly factor "political uncertainty" into prices. The savings gained in one area today might be reclaimed in another form tomorrow—through greater volatility, higher risk premiums, or more fragile expectations regarding rules. Therefore, Powell's call to "hold one's ground" wasn't really aimed solely at the DOJ, or even just at Trump. It seemed more like a message to all observers: If a central bank chairman must choose between "setting interest rates based on evidence" and "assuming personal legal risk," then this is no longer just one individual's predicament, but an inflection point for an entire system.
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