Federal Reserve Chair Jerome Powell is likely approaching his final weeks leading the central bank and now confronts a decision, following a Justice Department announcement on Friday, regarding his future with the institution.
U.S. Attorney Jeanine Pirro disclosed on social media that she has referred a criminal investigation into renovations at the Fed’s headquarters to the central bank’s inspector general, essentially removing the Justice Department from the matter for now.
Though a notable development, it becomes even more significant as Powell has pledged to remain until the criminal investigation is concluded.
With a decision now in hand, he faces a choice: Will he adhere to historical precedent and step back from the Fed, like most of his predecessors, or continue for the final two years of his governorship?
This choice could carry significant implications for policy-making during a particularly sensitive period.
“Powell has been secretive about his plans. If the investigation had not occurred, we believe he would have left the Fed entirely on May 15,” stated Krishna Guha, head of global policy and central bank strategy at Evercore ISI, in a note. “However, we think the DoJ’s actions may have come too late – and the uncertainty of resurrecting the probe is too unresolved – for Powell to depart on May 15.”
Instead, Guha speculated, Powell may choose to remain for a period even if he doesn’t complete the full governorship term ending in January 2028.
President Donald Trump has threatened to dismiss Powell if he does not resign voluntarily after his chair term concludes.
Key Issues
Central to this issue is the perceived risk to the Fed’s independence from political interference. Trump has been more vocal than any of his predecessors about pressuring the central bank, demanding decreased interest rates while threatening to remove Powell and actively seeking to oust Governor Lisa Cook.
Powell’s appointed successor, Kevin Warsh, has faced criticism from some Democratic congressional members as a Trump supporter who might further undermine the Fed’s appearance of independence. Warsh had a confirmation hearing this week, but Senator Thom Tillis, R-N.C., had pledged to block a committee vote until the completion of the criminal investigation.
“We suspect Powell will remain as a regular Fed governor for a few months to avoid any perception of a de facto plea agreement or resignation under duress,” Guha noted. “Warsh’s provocative discussions of ‘regime change’ at the Fed likely also raises the chances Powell remains temporarily to protect the institution and its personnel.”
A Fed spokesperson declined to comment on Powell’s future.
If Powell departs now, he will create an opening for Trump to appoint another member to the Board of Governors. Including Warsh, the president would then have three appointees on the seven-member board, alongside Governors Christopher Waller and Michelle Bowman from his initial term.
Market Reactions
While a voting majority in the Federal Open Market Committee is required to alter interest rates, having a board majority does exert some limited influence over policy and staffing decisions.
Conversely, if investors perceive the committee as politically skewed, they may react negatively to rate reductions.
However, David Zervos, chief market strategist at Jefferies, noted on Friday that he believes Wall Street would respond favorably to Powell’s resignation at this time. Zervos himself was considered for the Fed chair role but was not selected for the final group.
“A statement from Jay indicating he will be stepping down at the end of his chair term would actually lead the market to rise, resulting in a more optimistic rates market, meaning lower yields and higher prices,” Zervos explained during an interview with CNBC. “That impact would outweigh the significance of this lawsuit being dismissed.”
Powell will have the opportunity to discuss the topic on Wednesday when he holds his regular news conference post-FOMC meeting.
Despite Powell having been reticent about his intentions so far, markets will closely monitor this situation, alongside observing the Senate’s progression on Warsh’s confirmation. The incoming chair has expressed a preference for lower interest rates and re-evaluating other operational aspects of the Fed.
“Kevin’s position comes with considerable power,” Zervos noted. “He can alter many operational dynamics around the table.”
