The Trump administration's latest legal offensive against the Federal Reserve may be facing the risk of backfiring. This move has not only failed to pressure the incumbent Fed Chair Powell to step aside but has instead intensified speculation that he may remain on the Fed's Board of Governors after his term as Chair concludes in May 2026.
The Justice Department issued a grand jury subpoena to the Fed last week, an action viewed as an escalation of Trump's attempts to influence monetary policy. However, this maneuver has conversely solidified an expectation among Fed watchers: even if Powell himself has no desire to cling to power, he might choose to stay on to defend the institution's independence. Should this scenario unfold, a formidable "counterbalancing" force would emerge within the Fed, operating alongside a new Chair.
Former Cleveland Fed President Loretta Mester warned that such a power structure could evolve into a "two popes" scenario. In this environment, financial markets and the public might become confused about who truly holds sway and the direction of interest rates. Although Powell's allies indicate he has no intention of acting as a "shadow chair," his deep experience and record of defending the institution would inevitably lead outsiders to view him as an alternative authoritative voice.
Currently, Fed officials have signaled they will likely keep interest rates unchanged pending more data on inflation and employment. While this event has not yet directly impacted short-term monetary policy, the political and legal maelstrom it has created threatens Trump's succession plan. Key Republican member of the Senate Banking Committee, Thom Tillis, has explicitly stated he will oppose any Trump nominee until this dispute is resolved, further heightening uncertainty over the Fed's future leadership.
The "Two Popes" Dilemma and Market Concerns If Powell remains a Governor after stepping down as Chair, an highly unusual power dynamic could emerge within the Fed. Former Cleveland Fed President Loretta Mester described it as a "two popes" situation, where financial markets and the public might be perplexed about "who is in charge."
Antulio Bomfim, Global Head of Macro at Northern Trust Asset Management and a former advisor to Powell, noted that while Powell himself does not aspire to be a "shadow chair," his prestige as a former Chair, his experience, and his record of defending the institution would inevitably position him as an alternative authority within the Fed. Even if Powell subjectively avoids confrontation, the objective "dual center" effect could leave investors uncertain when interpreting monetary policy signals.
This situation would not only make it difficult for a new Chair nominated by Trump to establish authority but could also lead to increased market volatility. Investors are accustomed to seeking policy guidance from the Fed Chair's comments; in a committee with a "shadow chair," the consistency of policy communication would face severe challenges.
The Subpoena Controversy and Powell's Forceful Rebuttal Powell has long been tight-lipped about his future plans, and most Fed watchers previously expected him to leave the central bank next May. However, the Justice Department's subpoena has altered these expectations. The subpoena reportedly concerns Powell's congressional testimony from last June regarding the renovation of the Fed's headquarters.
On January 11, Powell issued a rare and forceful rebuttal via written and video statements. He characterized the legal action as part of a broader context of "government threats and ongoing pressure." Powell stated bluntly: "The threat of criminal charges is because the Fed sets interest rates based on our best assessment of serving the public, not following the President's preferences."
It is this forceful counterpunch that has sparked widespread speculation that Powell might choose to stay on to resist executive interference. While his term as Chair ends in May 2026, his term as a Fed Governor extends until January 2028.
Political Maneuvering and the Succession Conundrum The Trump administration's aggressive tactics have also created political obstacles for the Fed Chair succession plan. Key Republican Senator Thom Tillis on the Senate Banking Committee has vowed to oppose any Trump nominee for the Fed until this legal issue is resolved. This implies the confirmation process for a new Chair could deadlock.
Trump has previously stated he has chosen a successor for Powell but has not revealed the specific candidate. National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh are seen as top contenders. Steven Kamin, a senior fellow at the American Enterprise Institute, pointed out that while the FOMC typically seeks to cooperate with a new Chair, if the new Chair is sufficiently divisive, FOMC members might gravitate towards Powell, forming a kind of alliance.
Citing people familiar with the matter, media reports suggest that within the Trump administration and among its allies, there is growing concern that this escalated conflict could anger many current Governors and regional Fed presidents, thereby increasing the difficulty for a new Chair to implement policies.
The Battle for Control and a Potential "Nuclear Option" If Powell chooses to remain as a Governor, the most immediate impact would be to delay Trump's ability to appoint another Governor, hindering his plan to secure a majority on the Fed Board. Trump has long sought control of a board majority to exercise greater power over personnel, regulation, and institutional management, including potentially voting to dismiss regional Fed presidents not appointed by the President.
David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, analyzed that if the FOMC is unwilling to cooperate with a Trump-appointed Chair and regional Fed presidents become obstacles, Trump might pressure the Board to fire one or more presidents.
Furthermore, an upcoming Supreme Court hearing could be a wild card. The Supreme Court is scheduled to hear a case on January 21 regarding the dismissal of Fed Governor Lisa Cook (involving allegations of mortgage fraud). If Trump prevails on the issue of firing Lisa Cook, it would open the door to dismissing any Fed Governor, including Powell, fundamentally altering the Fed's power structure.
Regarding monetary policy, despite the intensifying political storm, the Fed's decision-making has not been directly disrupted so far. Policymakers cut the benchmark interest rate for the third consecutive time last month and signaled they would likely hold rates steady this month, awaiting more data on inflation and employment. However, as the issue of Powell's future continues to develop, the future policy path is becoming increasingly murky.
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