The chair of the US Federal Reserve, Jay Powell, faces a criminal investigation over a $2.5bn refurbishment of the central bank’s headquarters as the Trump administration intensifies its attacks on the institution.
Gold jumped to a record high on Monday and the US dollar fell as traders viewed the justice department’s probe as a dramatic escalation in the battle over US central bank independence.
In an unprecedented statement, Powell bluntly described the threats over the project as a “pretext”, pointing the finger instead at the administration’s desire to see the Fed slash interest rates to as low as 1 per cent.
What is driving the probe?
Donald Trump has claimed to have no involvement in the DoJ probe. But his administration has for months used the renovation project as a means to attack Powell.
The president’s allies have accused the Fed of misleading Congress over a renovation project that was approved during Trump’s first term but is now $700mn over budget. Trump also threatened last month to sue Powell for “incompetence” relating to the renovation.
Russell Vought, director of the Office of Management and Budget, has in the past compared the project to the building of the Palace of Versailles in France and described the cost overruns as “outrageous”. He has also attacked Powell for “grossly” mismanaging the refurbishment.
Powell’s statement on Sunday was the first time he has directly addressed Trump’s attempts to curtail the Fed’s independence to set interest rates free from political interference.
“No one — certainly not the chair of the Federal Reserve — is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure,” he argued.
Why has this happened now?
On the face of it, the timing of the Department of Justice probe appears odd. Powell’s second term as Fed chair ends in May.
However, the investigation is likely to be taken as a warning shot to whoever Trump picks to succeed him in the role of the world’s most important central banker. An announcement is expected later this month.
Allies of the president may also have decided to act now to force Powell to step down as a Fed board governor later this year.
Even after his term as Fed chair expires, Powell has the right to remain on the central bank’s board until January 2028. He has yet to say whether he will exercise that right.
While the broader Federal Open Market Committee, which features the 12 heads of the regional Feds, sets interest rates, the board steers the debate. Board governors also have the power to force out the heads of the regional Feds, as well as take on responsibility for the governance of the central bank.
The administration has also had little joy so far in trying to force out Fed governors by other means.
Last year, Trump attempted to fire Lisa Cook over allegations of mortgage fraud, saying that this constituted “for cause”, a legal term usually interpreted as gross malfeasance.
Cook, who has denied the allegations, has been given the right by the Supreme Court to remain at the Fed while her case against the president is ongoing. The Supreme Court is due to hear arguments on the case later this month.
Should Powell leave, presidential appointees would have control of the seven-strong board.
How will Congress react?
This is a key question, given the Senate has the power to determine whether Trump’s chosen successor as Fed chair and other governor nominations are confirmed.
The DoJ investigation comes as some Republicans show an increased willingness to defy the president — for example last week over the US’s intervention in Venezuela.
Thom Tillis, a Republican senator for North Carolina who has tussled with Trump before, said after the news broke that the Fed had received grand jury subpoenas that he would oppose the confirmation of any Fed nominee, including for the chair, until the legal matter is resolved.
He echoed Powell’s words in saying the central bank’s independence — seen as one of the cornerstones of the US’s economic policy and strength of its financial markets — is at stake.
“If there were any remaining doubt whether advisers within the Trump administration are actively pushing to end the independence of the Federal Reserve, there should now be none. It is now the independence and credibility of the Department of Justice that are in question.”
If others share his views, that could prove a deadly blow to Trump’s attempts to install an ally as Fed chair. White House economist Stephen Miran scraped through by just one vote when he was confirmed as governor last year.
The Democrats are already vociferously objecting to the probe. Elizabeth Warren, the top-ranking Democrat on the influential Senate banking committee, labelled Trump a “wannabe dictator” on Sunday evening.
Why is the renovation project under scrutiny?
Vought, a close ally of the president, claims that the Fed’s refurbishment of its Marriner S Eccles Building and the neighbouring 1951 Constitution Avenue is emblematic of what he, and other administration officials claim, is a lack of oversight at the US central bank.
Vought has said that even the Fed’s “number two building”, the William McChesney Martin Jr Building across the street from the Eccles Building, was “a palace”.
US Treasury secretary Scott Bessent has said a review of the decision to undertake the project should be conducted and called for a probe of the “entire Federal Reserve institution”.
Powell has attempted to rein in spending by removing some of the more lavish elements of the original plans, telling Congress last June that water features, beehives and rooftop gardens had been cut.
The DoJ investigation is thought to focus on whether he misrepresented the facts to lawmakers when describing those changes. However, many Fed-watchers share Powell’s view that the objection to the renovation project is a pretext to give the president more control over interest rates.
“The substance is less important than the fact that the Trump DoJ is doing this at all,” said Derek Tang of LH Meyer, a research firm.