Megan Messerly, Dasha Burns, Sam Sutton and Cassandra Dumay
5 min read
Treasury Secretary Scott Bessent spent months laying the groundwork for a smooth transition at the Federal Reserve that wouldn’t rattle markets.
That plan is now in disarray.
The Justice Department’s criminal investigation into whether Fed Chair Jerome Powell misled Congress about renovations at the Fed headquarters — and allegations over who leaked the news — has the White House in damage-control mode. Officials are scrambling to reassure markets and create distance from an episode that aides say was never meant to unfold, according to five people familiar with the administration’s reaction who were granted anonymity to discuss it.
The inquiry, which blindsided many White House aides, is renewing fears over the future of the central bank’s independence and offering fresh fodder for concerned Senate Republicans, many of whom will be needed to confirm the next Fed chair. Powell, whose term as chair ends in May, fanned those flames Sunday night, releasing an unusually direct statement framing the investigation as an attempt to pressure the institution to lower borrowing costs.
"This feud between Powell and the White House is, obviously, not good for markets," said Stephen Moore, a former adviser to President Donald Trump who remains close to the White House.
While Moore blasted Powell's management of the central bank's renovation, he said, “now is not the time to be bringing a criminal investigation against the Fed chairman.”
Privately, some White House officials see the episode as radioactive, with aides and allies eager to distance themselves from a probe they believe could do more damage to the White House than to Powell. One of the five people familiar said some inside and close to the White House are “freaked out” that a further threat to the Fed chief’s job security could spook the bond market.
White House press secretary Karoline Leavitt told reporters Monday that Trump did not direct the Justice Department to investigate Powell.
Aside from the immediate political backlash, the investigation could backfire in the long term for the Trump administration, solidifying Powell’s resolve to stay on the Fed board even after his chairmanship ends. That would deny the president the opportunity to fill a seat with an ally as he seeks a majority on the central bank’s seven-member board. Bessent said last week that he anticipated the president announcing Powell’s replacement either before or after his trip to Davos, Switzerland, later this month.
And given the Fed’s role in keeping a lid on inflation, the decision to target Powell in a criminal probe risks eroding Wall Street’s confidence in Trump’s economic agenda and the central bank’s credibility at a time when the president faces serious political challenges over his handling of the economy before the midterm elections.