Probe into the US Federal Reserve chair has created a gnawing sense that America is on the brink of becoming a banana republic
The news on Friday night that the Federal Reserve chair Jerome Powell is the target of a criminal probe regarding the refurbishment of the US central bank’s headquarters in Washington, DC came as a surprise not only to him, but reportedly to Donald Trump.
Whether that is true or not, it has created a worldwide storm and a gnawing sense that America is on the brink of becoming a banana republic.
The investigation reflects Trump’s brazen efforts to eviscerate the independence of the Fed, force Powell from his post, and appoint a more pliant successor who will lower interest rates at the US President’s whim.
The US President wants a Fed chair who will back his efforts to devalue the US dollar and use tariffs as a weapon of national security policy, even at the risk of eroding confidence in America’s stability and its currency.
Trump has threatened Powell on numerous occasions over the past year, referring to him by the moniker “Mr Too Late”, a reference to the US President’s fury over the Fed’s refusal to drop interest rates to levels favoured by the White House.
Only last month, Trump told reporters: “We’re thinking about bringing a suit against Powell for incompetence”, citing his concern that renovations at the Fed were costing too much.
Weeks later, Judge Jeanine Pirro, the Trump-appointed US Attorney for the District of Columbia and former Fox News “personality”, appears to have taken the cue from her boss. The White House and Pirro claim Trump had no advance knowledge of her attack-dog plans.
None of this would come as a surprise in totalitarian regimes elsewhere in the world. Bureaucrats loyal to autocrats regularly engage in skullduggery that they believe will appeal to the ruler, especially when it comes to incinerating the independence of any remaining governing institutions that are refusing to come to heel.
But in Powell, Trump and his lapdog Pirro may have bitten off more than they can chew. “The whole thing is proving a disaster for the White House,” Politico reported in its Tuesday morning “Playbook” that is eagerly digested over cornflakes throughout Washington. “You have to wonder how quickly this probe might get wrapped up,” the newsletter predicted.
Powell is the first chair of the Fed to come under criminal investigation. Three former occupants of his position and five former Treasury Secretaries came together on Monday to condemn the probe, echoing Powell’s warning that it is merely the latest act of intimidation and coercion orchestrated against the central bank by the Trump administration.
They called the criminal inquiry “an unprecedented attempt to use prosecutorial attacks to undermine [the Fed’s] independence”.
“This is how monetary policy is made in emerging markets with weak institutions,” they warned in cadences that fuelled Monday’s flight of capital into precious metals as Wall Street traders feared the worst.
On Tuesday, 11 chiefs of central banks worldwide expressed their “full solidarity” with Powell. In a letter signed by, among others, Bank of England Governor Andrew Bailey, they described Powell as having “served with integrity, focused on his mandate and an unwavering commitment to the public interest”.
On Capitol Hill, there were few Republican cheerleaders backing Pirro’s probe. John Thune, the Senate Majority Leader, told reporters he had not seen the detailed allegations against Powell, “but I’d say they better be real and they better be serious”. He called for the issue to be “resolved quickly”, warning of the risk of “political interference” to the Fed’s daily operations.
But Mike Johnson, the Republican Speaker of the House of Representatives, said prosecutors should feel empowered to investigate whether Powell lied under oath last year about the Fed’s £1.9bn renovation. “No, the Justice Department is not being weaponised,” he insisted.
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The oddest thing about the criminal investigation into “Mr Too Late” is that it can be accused of coming “too late”. Powell will be leaving his post in May, and Trump is already determining which loyalist will be selected to succeed him.
Kevin Hassett, the US President’s knee-bending chief economic adviser, is considered a front-runner. Kevin Warsh, a former Morgan Stanley banker and vocal critic of Powell, is also on the shortlist.
The main credential the next Fed chair will require is loyalty to the US President and a willingness to do his bidding. But the successful candidate will require Senate approval.
Pirro’s surprise efforts to brand Powell a criminal are unlikely to succeed. And they may backfire, emboldening some Republicans in Congress to think twice before rubber-stamping Trump’s choice as the next Fed chair, given copious evidence that the institution’s independence to set US monetary policy is now hanging by a thread.
