Angering Powell? Fed Could Adopt a More Hawkish Tone Under Trump’s Pressure

TradingKey - Since returning to the White House in 2025, the tension between U.S. President Donald Trump and Federal Reserve Chair Jerome Powell has continued to escalate. Trump has repeatedly pressured the Fed to significantly lower interest rates, accusing its policies of stifling economic growth and even publicly hinting at seeking Powell's removal. While the law provides the Fed chair with relatively solid protection against dismissal, this has not stopped the president from expressing his dissatisfaction.

And this week, this power struggle escalated—the U.S. Department of Justice has launched a criminal investigation into Powell, causing the Federal Reserve to face an unprecedented political shock.

Reportedly, the U.S. DOJ has issued a grand jury subpoena to the Federal Reserve regarding an investigation into its headquarters renovation project, where the budget has climbed from an initial $1.9 billion to $2.5 billion. Consequently, Powell himself faces potential criminal charges, an event that has drawn widespread attention from Wall Street, Congress, and global markets.

However, many analysts believe that this legal action may ultimately backfire. Instead of gaining control over the Fed, this move could intensify calls for its independence and may make Powell even more determined to remain at the central bank.

Will Powell stay?

For a long time, Fed Chair Jerome Powell has tried his best to avoid direct confrontation with President Trump.

In the past, Trump pushed for increased oversight of the Fed and attempted to replace some board members. In the face of these pressures, the Fed made concessions on certain non-core issues such as climate policy and financial regulation. However, on key matters like interest rate policy, Powell has always stood his ground, insisting on the central bank's independence.

However, this approach is changing. The U.S. DOJ has launched a criminal investigation into whether Powell made false statements during congressional testimony. Many analysts believe the Fed may no longer remain silent as it has in the past, but will instead more explicitly defend its authority.

"Trump has now used the nuclear option, so Powell has no reason not to speak his mind anymore," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist of the IMF.

Currently, Powell's term as Fed Chair is set to end in May. However, unless he resigns voluntarily, his term as a member of the Board of Governors will continue until January 2028.

Data from the betting platform Polymarket shows that since Powell responded to the investigation on January 11, market expectations for his resignation by the end of May or the end of the year have dropped significantly. As of now, only 45% of bettors believe he will leave the Board by May 30, down sharply from 74% at the start of the month.

"Shadow Chair"? Powell's influence may persist

In the ongoing dispute between President Trump and Fed Chair Powell, a seemingly paradoxical situation is emerging: Political pressure to push for significant rate cuts may instead drive the Fed toward a more conservative monetary policy stance .

Chris Whalen, chairman of Whalen Global Advisors, analyzed that Trump's intervention in the Fed, particularly the pressure for rapid rate cuts, could fuel market concerns about a rebound in inflation. If inflation expectations rise again, the Fed might have to aggressively raise rates in the future to restore market confidence, which would severely undermine its policy consistency and credibility.

Under such risks, the Fed will be more inclined to emphasize its policy independence to maintain distance from politics. The DOJ investigation into Powell, rather than weakening this trend, has instead further magnified the issue of central bank autonomy, making it a focus of national attention.

In this context, Powell, who was previously open to whether he would remain as a governor, is becoming more resolute. To defend the neutrality of the central banking system, he is likely to choose to remain as a governor until his term expires in 2028 after his tenure as Fed Chair concludes.

Whalen pointed out that even after stepping down as Chair, Powell, by virtue of his position as a governor and his policy experience, could still solidify his influence at the policy level and become a "shadow chair" —remaining out of the spotlight yet still capable of guiding certain policy directions and influencing the market's interpretation of the Fed's stance.

In his view, Trump's strategy in handling Fed matters is one-sided and inappropriate. If the goal were simply to replace the leadership, he could have directly stated that the Fed needs a new chair, rather than launching an attack on Powell personally through legal channels.

Wall Street sends warning signals

Several heavyweight Wall Street executives have spoken out, emphasizing the importance of maintaining the Fed's policy independence and expressing concern over ongoing external political interference. They believe that once the central bank's independence is compromised, it could not only drive up inflation expectations but even shake market confidence in the long-term prospects of the U.S. economy.

JPMorgan Chase CEO Jamie Dimon stated that among almost all industry professionals he has encountered, they support the Fed maintaining a neutral stance without exception. He believes that breaking the barrier between the central bank and political power could create counter-productive forces, directly pushing up inflation expectations and potentially leading to higher interest rates in the future. In his view, it was precisely the Fed's independent operational mechanism that played a crucial stabilizing role in last year's extremely complex economic environment.

Bank of America CEO Brian Moynihan expressed similar concerns. He noted that it is precisely because the Fed has the authority to independently set policy based on economic data that the U.S. economy can maintain a long-term competitive advantage on the global stage. He believes that an institutionally independent Fed is an important foundation for the resilience of the U.S. economy, a fact clearly reflected in the capital markets.

BNY Mellon CEO Robin Vince believes that weakening central bank independence would not only undermine the foundation of the bond market but could also push up long-term interest rates. He emphasized that the global community has spent decades practicing the necessity and effectiveness of independent central banks; if the Fed's decisions were to be influenced by short-term politics in the future, the negative impact on markets could far exceed expectations.