Former officials say DOJ probe threatens Fed indepence, has 'no place in the United States'

A coterie of former Federal Reserve chairs, Treasury secretaries, and prominent economists spoke out Monday in support of Fed Chair Jerome Powell and expressed alarm over the Justice Department's threat of a criminal prosecution at the central bank.

“The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine [the Fed's] independence,” said the statement signed by former Fed Chairs Janet Yellen, Ben Bernanke, and Alan Greenspan, as well as four past Treasury secretaries who served under both Republican and Democratic presidents.

“This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly,” it continued. “It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.”

Yellen told CNBC on Monday that the investigation compromises the central bank’s independence and said she thinks financial markets should be more concerned about a situation she called “extremely chilling.”

Markets were responding in early trading Monday, with stocks wavering on the news. The dollar, Treasurys, and US equities futures slid, though the declines were small.

'Worst of all worlds' for Trump?

Wilmer Stith, senior bond portfolio manager for Wilmington Trust, warned that bond yields could move higher, raising borrowing costs for consumers, especially for mortgages, and counteracting any relief from Fannie Mae and Freddie Mac’s $200 billion purchase of mortgage bonds.

President Trump is "shooting himself in the foot because he's trying to bring down mortgage rates, trying to allow first-time homebuyers to afford a house,” said Stith.

Stith warned that yields are likely to move higher as concerns grow about central bank independence and the Fed’s willingness to bring down inflation as investors demand compensation for the erosion of principal.

Others warn that Trump’s willingness to use criminal subpoenas to pressure the Fed will make it even harder for the next Fed chair to convince markets and the public of central bank independence, which could in turn make it harder to control inflation expectations.

Krishna Guha, head of global policy and central banking strategy for Evercore ISI, predicted that the criminal investigation would unite the rest of the Fed around Powell and also isolate Trump’s nominee for Fed chair when they arrive.

Guha said he thinks those dynamics will increase the likelihood that Powell will remain at the Fed as a governor, "denying the new chair a natural majority, and threatening to derail what we believe was a hope and expectation that the old Committee could meet the new chair halfway.”