Trump vs Powell 2.0

The Federal Reserve Chairman Faces Charges Again

Has the shadow war between Federal Reserve Chairman Powell and the Trump administration evolved into an unprecedented institutional showdown in U.S. financial history? When a criminal investigation subpoena landed on the Fed chief’s desk, this usually gentle and refined official chose not to back down, but instead launched the most direct public counterattack. This response not only determines his personal career fate but could also fundamentally change the rules of the global financial market.

According to The Wall Street Journal, Federal Reserve Chairman Powell released a two-minute video statement on Sunday night, officially breaking his years-long deliberate avoidance of political conflict. This is not only a public stance but a complete breakaway.

In the video, Powell harshly accused the current administration of attempting to use the threat of criminal prosecution to pressure the Federal Reserve to lower benchmark interest rates. He made it clear that the Justice Department's investigation is essentially political interference and a direct challenge to the Fed's ability to operate independently.

Looking back at the incident, the subpoena was delivered late last Friday night. Powell, who has a legal background, did not choose to bargain in private. Instead, he and his advisors spent the weekend plotting and decided to bring the confrontation into the public eye.

In the video, Powell bluntly stated that the threat of criminal charges from the Department of Justice is the price the Fed pays for insisting on acting in the public interest rather than following the president's preferences. This extremely tough and straightforward attitude completely abandons his previous cautious and neutral diplomatic language.

Interestingly, the White House's reaction seemed somewhat subtle. Trump claimed in an interview that he was completely unaware of the Justice Department's subpoena and emphasized that any criminal investigation is unrelated to disagreements over interest rate policy.

But is that really the case? On the surface, the trigger for this criminal investigation was Powell's congressional testimony last year regarding a $2.5 billion renovation project. However, what’s intriguing is that the accusations of false statements or misconduct came from pro-Trump Republican officials, and the investigation is led by Attorney General Pam Bondi, who reports directly to Trump. This means the investigation has had strong political overtones from the very beginning.

In his statement, Powell ruthlessly exposed this veneer of legality. He bluntly pointed out that the so-called construction project violations are just a cover story, and the real goal of the administration is to destroy the Fed's independence. In Powell's view, legal tools have already become political weapons to force interest rate cuts.

Jason believes, to be honest, Powell's video really shocked me—it's rare to see him appear so haggard and without glasses on camera.

So, back to the question, what will be the impact of this incident on the Fed's independence? And how will the stock market be affected?

Regarding independence, the Federal Reserve Board and FOMC are both committee-based, making decisions collectively like a board of directors. Although the chairman has the power to set the agenda and guide consensus, ultimately, he alone cannot control the entire Fed.

However, if the Supreme Court eventually rules in favor of the Justice Department, forcing Powell to step down through criminal procedure rather than the Federal Reserve Act, or if Powell simply cannot withstand the pressure and voluntarily resigns as chairman and board member, this could result in long-term structural impacts on the Fed's personnel composition and decision-making processes.

In terms of personnel, the current Federal Reserve Board members include Powell, Jefferson, Barr, Bowman, Waller, Milan, and Cook—a total of seven. Besides Powell, who was nominated by both parties, three of the remaining six were nominated by Democrats and the other three by Republicans. This balance is why the board can remain neutral.

But if Powell leaves, the White House will inevitably push for the next chairman candidate—either Hassett or Walsh—to replace him. As a result, regardless of whether the next appointee is pro- or anti-regulation, at least from a political standpoint, the board is likely to lose balance and tilt toward the Trump administration. Checks and balances will essentially disappear, and powers regarding reserve requirements, discount rates, and bank supervision will align with the White House, not to mention any possible changes involving Cook.

From a decision-making perspective, if the criminal prosecution succeeds, then whether current or future board members, they will all be under invisible political pressure, which may lead to indecision. The structural result is a blow to the Fed’s confidence and ability to control inflation.

Today's surge in long-term bond yields to nearly 4.9% is the market's most direct reaction. On the other hand, the stock market appears to be only slightly affected, without a major downturn, but over time it will be impacted by inflation and the bond market. This is definitely not good news.

But! Will this happen? Who will make the final decision? It's not Trump, not the White House, nor Powell or the Fed. It's the U.S. Supreme Court. Even if the White House can prosecute Powell, the final ruling must still follow legal procedures. So, will the Supreme Court side with the White House politically as they wish?

I think the probability is very low.

Historically, the Supreme Court has maintained as neutral a stance as possible in rulings involving tariffs and executive power. Even though most justices are Republican nominees (appointed by Trump), their lifetime tenure and the design of the separation of powers help the Court balance the two parties and maintain social justice as much as possible.

In summary, I believe Powell will not step down because of this—in fact, he is likely to remain on the board. The White House may replace Milan with a new chairman, and the Federal Reserve Board will ultimately achieve balance. Everything will return to normal.

So, the stock market may experience a brief shock, but it will soon return to narratives of tech, profitability, and consumption value, and will not be constrained by this news in the long run. If something unexpected happens in the future, we can discuss it then, but for now, there’s no reason to be overly sensitive.