The various battles surrounding the Federal Reserve have finally reached their decisive moment. With the criminal investigation into incumbent Chair Powell triggering political backlash and a key case set to be heard by the Supreme Court next Wednesday, the power struggles surrounding the Fed could all be decided next week. Investigating Powell: Political Backlash and "Finding a Way Out" The criminal investigation into Fed Chair Powell appears to be evolving into a political backlash against the Trump administration. Last weekend, US prosecutors issued a subpoena to Powell concerning the renovation costs of the Fed building. On January 11th, Powell issued a rare, strongly-worded statement, condemning the move as a pretext to undermine the central bank's independence. This counterattack has found resonance within the Republican party, seemingly sending a clear signal to the White House: if the investigation is not terminated, the confirmation process for the next Fed Chair nominee will face significant obstacles. Facing this pressure, Trump's core advisors have begun attempting to "find a way out." Last Friday, National Economic Council Director Kevin Hassett, appearing on Fox Business, tried to downplay the situation, calling it a "simple information request" and suggesting the matter could be closed once the information was provided. Treasury Secretary Scott Bessent subsequently echoed this sentiment, hinting that the matter could be put to rest once prosecutor Jeannie Pirro received a "satisfactory response." The logic behind this shift in attitude is clear: Trump needs to maintain plausible deniability that he "did not order the investigation," and quietly closing the case is likely the best path forward, which also aligns with the interests of the next Fed Chair— After all, if the current administration can use judicial means to threaten Powell, future successors would also perpetually operate under the same shadow. The Supreme Court: The Cook Case and the Battle for the Fed's Survival Compared to the political maneuvering in the Powell investigation, next Wednesday's Supreme Court hearing on the case involving Fed Governor Lisa Cook is an even more existential battle concerning the Fed's "independence." Last August, Trump attempted to fire Cook, citing "mortgage fraud" (which Cook vehemently denies); Cook subsequently launched a legal counterattack to defend her right to hold office. The outcome of the case will also have significant implications for Fed independence—if the Supreme Court rules that Trump had the authority to fire Cook, it would mean a president could arbitrarily dismiss any Fed official. Data shows US fourth-quarter GDP growth reached 4.3%, while Trump has publicly demanded interest rate cuts to "near zero" and called for the Fed Board to comply. Forcing rate cuts in the face of such strong economic data lacks justification in the view of most economists. If investors perceive the Fed as no longer independently fighting inflation, bond yields could surge dramatically. Currently, signals from the Supreme Court lean towards protecting Cook, but any shift in stance during Wednesday's hearing could trigger significant market volatility. Who Will Take the Helm: The "Two Kevins" or Someone Else? Simultaneously, the decision regarding the nominee for the next Fed Chair is also expected to be announced next week. Although the candidate list once included BlackRock executive Rick Rieder and current Governor Christopher Waller, these two reportedly failed a "loyalty test" due to insufficient closeness to Trump. The market widely anticipates the final choice will be between the "two Kevins"—Kevin Hassett and Kevin Warsh. Current indications suggest Hassett is nearly out of the running. Despite his extreme loyalty to Trump, Trump told Hassett directly last Friday:
"I actually want to keep you in this position [White House economic advisor]."
It now appears highly likely that the Fed Chair position will go to former Fed Governor Kevin Warsh. For Wall Street, this might be welcome news. Executives like Jamie Dimon generally believe the market would react more favorably to Warsh than to Hassett, who struggles to shed the "Trump mouthpiece" label. Warsh is seen as possessing both professional competence and the ability to maintain a degree of independence—even though Trump does not wish to repeat the Powell experience by selecting a Chair who appears pliable but turns out to be strong-willed. Next Wednesday, Trump is scheduled to deliver a significant speech in Davos. Treasury Secretary Bessent anticipates the final decision could be announced either before Trump's departure or after his return. While Trump could still delay the decision or even spring a surprise with another candidate, all signs indicate that the contest for control of this global financial nerve center is essentially decided.
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