Criminal investigation of Fed chair worries experts about Fed independence

Economists and business leaders say a criminal investigation into Federal Reserve Chairman Jerome Powell has them concerned about the central bank’s independence.

In a video statement on Sunday, Powell announced that the Department of Justice served subpoenas to the Fed, “threatening a criminal indictment” over comments he made last summer related to building renovation projects, the costs of which have grown significantly.

But the investigation isn’t really about the renovation work, according to Powell. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,” he said.

The DOJ probe is “extremely chilling,” Janet Yellen, former Fed chair and Treasury secretary, told CNBC, adding she was “surprised the market isn’t more concerned.”

In an interview with NBC News on Sunday evening, President Donald Trump denied knowing about the subpoenas, which Powell said were issued Friday.

Trump has loudly criticized how the Fed under Powell has handled interest rates, arguing that they’re too high. Despite claiming he did not know about the subpoenas, Trump told NBC News that they didn’t have anything to do with the Fed’s actions on interest rates.

“If the Federal Reserve becomes politicized, then that would indicate that decisions about interest rates or other things that the Fed does are going to be based on politics and not on data, which is remarkably problematic,” Abigail Hall, an economics professor at the University of Tampa, told CFO Brew.

If businesses lose confidence in the Fed’s impartiality, they lose confidence in what the economic future may look like, Hall continued. In that situation, they tend to hold off on making decisions until there’s more certainty.

“This is problematic because if you’re adopting a wait-and-see attitude, you’re not producing things, you’re not investing; you are sitting on your hands,” she said. “From an individual company perspective, that’s certainly not a way to really push revenue generation forward. But…on a macroeconomic scale, you’re talking about economic stagnation, because you lack the predictability.”

The Trump administration’s attempts to influence the Fed through legal threats “could drive inflation expectations higher, erode the dollar’s safe-haven role, and trigger a sharp rise in long-term bond yields that raises borrowing costs across the American economy,” Karl Schamotta, chief market strategist at corporate payments company Corpay, told Reuters.