Analysis of the Potential Impacts of the Federal Reserve Chair Facing a Judicial Investigation

The U.S. Department of Justice formally launched a criminal investigation into Federal Reserve Chair Jerome Powell in November 2025, a move unprecedented in the history of the U.S. central bank. According to a report by The New York Times, the investigation was initiated by the U.S. Attorney’s Office for the District of Columbia, led by Jeanine Pirro, a prosecutor appointed by President Trump. The investigation focuses on two core issues: first, cost overruns in the renovation of the Federal Reserve’s Washington headquarters— the project’s budget ballooned from an initial approximately $1.9 billion to at least $2.5 billion; second, whether Powell made false statements regarding the specific details of the renovation project during his testimony before Congress in June 2025, including the existence of luxurious facilities such as a VIP dining room, private elevators, water features, and new marble decor [1][2].

On January 11, 2026, Powell released a rare two-minute video statement, explicitly characterizing the investigation as an “excuse” for the government to pressure the central bank to submit to political goals. In the statement, he noted that the relevant testimony pertained to “a multi-year renovation project of the Fed’s historic office building,” and emphasized that these legal threats are essentially a direct challenge to the central bank’s independent decision-making capability [1]. This incident marks the escalation of the long-standing policy rift between the Trump administration and the Federal Reserve from public verbal confrontation to formal judicial confrontation.

The Federal Reserve’s independence has long been regarded as a core pillar of the stability of the U.S. financial system, and its operational logic is based on the consensus that “central banks should formulate policies based on economic data rather than political considerations.” Former Federal Reserve Chairs Alan Greenspan, Ben Bernanke, and Janet Yellen have jointly issued a statement strongly condemning the investigation, calling such practices “unprecedented,” noting that they resemble “tactics used by weaker institutions in emerging markets,” and warning that they could seriously undermine U.S. economic stability and public trust in the Federal Reserve [3].

In an interview with The Wall Street Journal, Eswar Prasad, an economist at Cornell University, pointed out that Trump has “clearly stated that he will not accept any outcome where the Federal Reserve does not bend to his will in its decisions.” This judgment reveals the deep-seated nature of the current crisis: when criminal investigations can be used as policy leverage, future Federal Reserve officials will have to consider political consequences rather than purely economic factors when formulating monetary policy [4].

From the perspective of monetary economics, the core value of the Federal Reserve’s independence lies in its ability to “anchor inflation expectations.” According to a research report released by Invesco, if market participants believe the Federal Reserve is no longer independent, investors will demand higher risk premiums to hold long-term Treasury bonds and risky assets, which will push up mortgage rates and corporate borrowing costs—an effect that cannot be offset even if policy rates themselves are lowered [3]. This “credibility risk” may cause the monetary policy transmission mechanism to fail, rendering the central bank’s traditional tool of stimulating the economy through interest rate cuts ineffective.

A more far-reaching impact is the institutionalization of governance risks. If criminal investigations targeting Federal Reserve officials become a normalized tool for political struggle, future members of the Federal Open Market Committee (FOMC) may more carefully weigh the White House’s political stance when voting, rather than solely focusing on economic data. This “chilling effect” will make monetary policy more responsive to election cycles rather than business cycles, thereby weakening the central bank’s effectiveness in regulating economic fluctuations [4].

The current market reaction to this incident shows a clear risk-averse tendency. The price of gold has continued to rise, reflecting growing investor concerns about the institutional stability of the Federal Reserve; fixed-income assets, particularly high-quality Treasury bonds, are favored, indicating that investors are hedging against potential monetary policy chaos [3]. In addition, digital assets such as Bitcoin have also benefited from capital inflows amid institutional instability.

Notably, interest rate-sensitive small-cap stocks and shares of unprofitable technology companies are facing selling pressure. The logic behind this phenomenon is that the decline in policy predictability makes the discount rate parameter in valuation models more uncertain, and uncertainty premiums are the main source of risk for such high-growth, high-volatility assets [3].

Several top investment institutions have begun adjusting their investment recommendations. Allianz Global Investors advises investors to reallocate their portfolios along the risk curve, increasing the proportion of illiquid assets such as private debt and infrastructure to manage rising market volatility [3]. Morgan Stanley recommends shifting from traditional cash holdings to medium-risk opportunities such as fixed income and private markets, emphasizing the importance of diversified investment in the current environment [4].

From a trading strategy perspective, a report by TheStreet notes that “the cost of misjudging the Fed’s path is rising.” Leveraged trades and long-duration transactions that assume smooth policy operations may face sharp pullbacks, as any political shock could cause market expectations to shift at a pace that outstrips changes in economic data itself [4].

If the Federal Reserve’s independence continues to be impaired, it may trigger a series of negative chain reactions at the macroeconomic level. First, overly loose policies adopted to cater to political pressure may lead to a resurgence of inflation, thereby eroding the purchasing power of cash and undermining price stability. Second, the U.S. dollar’s status as the global reserve currency may be shaken—international investors’ willingness to hold U.S. dollar assets is largely based on trust in the independence of U.S. monetary policy. Third, the risk of capital misallocation rises: if monetary policy serves short-term political goals rather than long-term economic equilibrium, capital flows will deviate from their most productive uses, thereby reducing overall economic efficiency [3].

From the perspective of institutional evolution, this incident may usher in a new phase in the relationship between the Federal Reserve and the executive branch. Some Republican lawmakers have stated that they will block Trump’s nominations of new Federal Reserve officials until the investigation is concluded, and this cross-party backlash provides a certain degree of political protection for Powell. However, if the investigation continues to escalate or ultimately leads to criminal prosecution, regardless of the outcome, it will seriously shake market confidence in the Federal Reserve’s independence.

Aaron Klein, a fellow at the Brookings Institution, warned that this case may set a dangerous precedent where future Federal Reserve chairs may “bypass data and favor political interference” when formulating policies. The cumulative effect of such institutional degradation may gradually emerge in the coming years, at which point monetary policy will no longer be a tool for stabilizing the economy, but an appendage of the political cycle [4].

Taken together, the U.S. Department of Justice’s criminal investigation into Federal Reserve Chair Jerome Powell represents a watershed event for the independence of U.S. monetary policy. In terms of direct impacts, the investigation itself has already dealt a blow to market confidence and prompted investors to adjust their asset allocation strategies to hedge against policy uncertainty. In terms of indirect impacts, this incident may change the decision-making behavior pattern of future Federal Reserve officials, making monetary policy more politicized.

For investors, the current environment requires heightened sensitivity to the path of interest rate policy, as well as a re-examination of the resilient allocation of investment portfolios. Fixed-income assets, physical assets, and high-quality large-cap stocks with moat advantages may have greater defensive value in the current environment of rising uncertainty. For policymakers, how to uphold central bank independence while responding to public demands for government accountability will be the key variable determining the ultimate impact of this incident.

[1] CBS Austin - “DOJ probes Fed Chair Powell for alleged false testimony on renovation costs” (https://cbsaustin.com/news/nation-world/doj-probes-fed-chair-powell-for-alleged-false-testimony-on-renovation-costs-grand-jury-subpoenas-)

[2] The National News Desk - “DOJ probes Fed Chair Powell for alleged false testimony on renovation costs” (https://cbsaustin.com/news/nation-world/doj-probes-fed-chair-powell-for-alleged-false-testimony-on-renovation-costs-grand-jury-subpoenas-)

[3] AInvest - “The Federal Reserve’s Independence Under Threat: Implications for Market Stability and Investor Strategy” (https://www.ainvest.com/news/federal-reserve-independence-threat-implications-market-stability-investor-strategy-2601)

[4] TheStreet - “Investors brace for impact as Trump takes aim at Fed” (https://www.thestreet.com/investing/investors-brace-for-impact-as-trump-takes-aim-at-fed)