Fed Challenged

Fed Meeting Overshadowed by Legal Feuds

The Fed made no big policy moves on Wednesday, keeping the benchmark rate in the 3.50%–3.75% range as expected. But the focus is on the noise around the institution.

The Department of Justice has opened a criminal investigation into Fed Chair Jerome Powell, related to a Senate testimony he gave on renovations to the Fed buildings. The White House is also embroiled in a legal battle to fire Fed Governor Lisa Cook.

All this is taking place as President Donald Trump is expected to announce a successor to Powell, whose term ends in May.

Central Bankers' Defense Force

In an unprecedented move, 11 leading central bankers around the world declared their support for Chair Powell. The list includes the chiefs of the ECB and the Bank of England, among others. The heads of the Bank for International Settlements, known as the bank for central banks, also signed the letter.

Why such a strong reaction? Central bankers worry that the investigation is politically motivated.

“The independence of central banks is a cornerstone of price, financial, and economic stability in the interest of the citizens that we serve,” they wrote.

Former Fed chairs Janet Yellen, Ben Bernanke, and Alan Greenspan have also publicly supported Powell.

Markets Dislike Political Interference

Independent central banks can make difficult monetary policy calls, keeping the prices stable, even when it’s politically painful.

Independence shields monetary policy from short-term political pressures and lets central banks focus on long-term goals: keeping inflation in check and maintaining financial stability.

When politics intrudes, uncertainty in the markets rises — and that hits everything from mortgage rates to stock valuations. Long-term borrowing costs may creep up, the currency may weaken, and, in the worst-case scenario, the distrust may even trigger a full-blown capital flight.

Pressure Piles on Central Banks

Clashes between governments and central banks are common, even when the institutions are legally protected:

• In Japan, Prime Minister Sanae Takaichi campaigned against the Bank of Japan’s rate hikes, calling tightening “stupid,” before softening her stance once in office.
• In the UK, former PM Liz Truss repeatedly criticised the Bank of England, and her unfunded “mini‑budget” forced the BoE to intervene to stabilize gilt markets.
• Turkey has cycled through five central‑bank chiefs since 2019, as President Recep Tayyip Erdoğan opposes rate hikes. The lira has plunged, and inflation has surged.
• In Iran, the central bank governor was removed early as nationwide cost‑of‑living protests intensified.

The Rise of Modern Independence

The idea of insulating central banks from politics is relatively new.

• The US Federal Reserve, founded in 1913, only gained real autonomy after the 1951 Treasury–Fed Accord, which freed it from keeping government borrowing costs low.
• New Zealand pioneered modern operational independence in 1990, prompting many others to follow.
• The Bank of England gained rate‑setting independence in 1997, and the Bank of Japan in 1998.
• The ECB, founded in 1998, was designed to be highly independent from the start to avoid political pressure across the Eurozone.

But independence isn’t universal. China’s PBOC operates under close government direction, and in many countries, independence exists more on paper than in practice.

The Fed’s New Leader

Regardless of the ongoing investigation, Jerome Powell’s term as the Fed chair is about to end.

For a long time, the betting markets positioned National Economic Council director Kevin Hassett as the top candidate to replace him, but President Trump recently said that he wants to keep Hassett in his current role. Former Fed governor Kevin Warsh and current governor Christopher Waller have interviewed for the role. BlackRock’s fixed-income executive, Rick Rieder, was the last to interview and has emerged as a potential surprise pick.