DOJ’s Investigation into Powell Raises a Major Question: How Will Interest Rates Be Affected?

DOJ Investigation Into Powell Unlikely to Impact Fed’s Rate Decisions

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Although the Department of Justice’s investigation involving Federal Reserve Chair Jerome Powell has sparked some concern, it is not expected to alter the Federal Reserve’s immediate approach to interest rates.

Main Points

• The DOJ’s inquiry into Fed Chair Jerome Powell has not shifted market expectations regarding the Federal Reserve’s upcoming interest rate announcement.
• Investors continue to estimate only a 5% probability of a rate cut at the Fed’s January 28 meeting, a figure that has remained steady since news of the investigation emerged.
• Interest rate decisions are determined by a committee through an established process, and there is currently no evidence that the investigation will disrupt this procedure.

Why the DOJ’s Probe Is Drawing Attention

The Justice Department has launched a criminal investigation involving Jerome Powell, the head of the Federal Reserve—an unusual event that comes just ahead of the central bank’s next interest rate decision. With headlines swirling, it’s natural to wonder if this development could influence the Fed’s upcoming actions.

The Federal Reserve’s rate decisions have a direct impact on personal finances, affecting both the interest earned on savings and the costs associated with variable-rate borrowing, such as credit cards. Whether this recent news will influence interest rates depends on the Fed’s internal decision-making process and whether there is any reason to believe that process might change.

Why This Is Significant

Major news involving the Federal Reserve can create the impression that interest rates are suddenly uncertain. However, this investigation has not changed the outlook for the Fed’s next move or the way decisions are made.

Markets Remain Steady on January Rate Cut Odds

Despite the DOJ’s investigation, market expectations for the Fed’s next steps have held firm. Investors continue to see little likelihood of a rate cut at the upcoming meeting, with the central bank scheduled to announce its decision on January 28. Futures markets currently assign only a 5% chance to a rate cut in January, the same as before the DOJ’s involvement became public knowledge.

Looking further ahead, expectations for rate cuts increase at later meetings, as illustrated in the chart below. However, current market pricing suggests that the Fed may not lower its benchmark rate by at least a quarter percentage point until the June meeting.

Why the Fed’s Policy Process Remains Unchanged

One reason market expectations have not shifted is that a criminal investigation does not equate to an arrest or formal charges, nor does it automatically disrupt the Federal Reserve’s operations. Powell is still anticipated to lead the upcoming meeting, and the central bank’s timetable and procedures remain unaffected.

More importantly, interest rate decisions are made collectively by the Federal Open Market Committee (FOMC), not by the chair alone. The committee bases its decisions on current economic indicators, such as inflation and employment figures, and there is no indication that an unrelated legal matter would influence how members determine the appropriate course for interest rates.