Former Federal Reserve leaders, Senators slam DOJ's inquiry

(The Center Square) – Former Federal Reserve leaders and a top Republican Senator raised concerns about the independence of the U.S. central bank after Chairman Jerome Powell announced a Justice Department investigation. 

In a rare move, Powell on Sunday released a video statement publicly disclosing the probe and saying it was filed because the central bank hasn't bowed to President Donald Trump's pressure campaign to lower interest rates. 

Powell said the Department of Justice served the Federal Reserve with grand jury subpoenas on Friday, threatening a criminal indictment related to Powell's testimony before the Senate Banking Committee last June about a multi-year Federal Reserve renovation project.

"This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress's oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project," Powell said in the video. "Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."

Sen. Thom Tillis, R-N.C., a member of the Senate Banking Committee, said Monday he plans to block confirmation of any new nominees to the central bank until the matter is resolved. He also took a shot at the Justice Department.

"If there were any remaining doubt whether advisers within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none," Tillis said in a statement. "It is now the independence and credibility of the Department of Justice that are in question."

Former Federal Reserve leaders, including Ben Bernanke, Alan Greenspan and Janet Yellen, were also critical of the Justice Department investigation.

"The Federal Reserve's independence and the public's perception of that independence are critical for economic performance, including achieving the goals Congress has set for the Federal Reserve of stable prices, maximum employment, and moderate long-term interest rates," they wrote in a statement. "The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine that independence."

The group, which also included other former economic leaders, said Trump's move would undermine the bank's independence from politics.

"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," they wrote. "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."

U.S. Senator Lisa Murkowski, R-Alaska, said she spoke with Powell on Monday morning.

"It's clear the administration’s investigation is nothing more than an attempt at coercion," she said. "If the Department of Justice believes an investigation into Chair Powell is warranted based on project cost overruns – which are not unusual – then Congress needs to investigate the Department of Justice."

She added: "The stakes are too high to look the other way: if the Federal Reserve loses its independence, the stability of our markets and the broader economy will suffer."

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Powell's term as chairman ends in May. Trump has made it clear that he plans to replace Powell with someone who wants to lower benchmark interest rates.

Sen. Elizabeth Warren, D-Mass., told CNN on Monday that the president was "weaponizing the Department of Justice" and that the move would be bad for the U.S. economy and consumers. 

Trump personally toured the Federal Reserve renovation project last summer with Powell. The president used the visit to once again publicly call for lower interest rates. Tillis joined the president at the time.

Back in July, Powell defended work on the renovation project, which he said was hampered by multiple challenges. The project was estimated to cost $1.9 billion in 2023. By last summer, the costs had grown to $2.5 billion after issues with the high water table, asbestos and toxic contamination in the soil.

Cato scholar Jai Kedia said that past interventions haven't worked out.

"Historical episodes of executive interference with monetary policy always lead to bad economic outcomes like high inflation," he said. "This episode demonstrates that our current system of setting the federal funds rate target is too arbitrary and discretionary. It leaves too much scope for subjectivity and thereby invites criticism from politicians seeking a scapegoat. It is imperative that we instill objective, rules-based, monetary policy to both improve economic outcomes and shield the Fed's independence."

White House press secretary Karoline Leavitt said Trump's comments didn't spark the investigation.

"The president has every right to criticize the Fed chair. He has a First Amendment right, just like all of you do. And one thing for sure, the president has made it quite clear, Jerome Powell is bad at his job," she said Monday. "As for whether or not Jerome Powell if a criminal, that's an answer for the Department of Justice."

Until Sunday, Powell had taken Trump's name-calling and public pressure campaign in stride. Last July, when asked about how Trump's comments had affected him, Powell said he was focused on doing his job. The line drew applause from a stage filled with other central bankers.

Since returning to the White House for his second term, Trump has called Powell every name in the book. One of the president's favorites for Powell has been "numbskull." He's also given Powell the nickname "Too Late" for not cutting interest rates as fast as Trump would like.

Powell has largely ducked Trump's criticism. When Trump criticized cost overruns on the remodel, the Fed chairman referred the matter to the central bank's inspector general.

Trump has wanted to fire Powell for years and has been openly searching for a replacement.