5 questions about the DOJ probe into the Fed, Jerome Powell

(The Hill) — The Department of Justice (DOJ) has launched a probe into the Federal Reserve's renovation of its headquarters, a move that comes amid a battle between President Donald Trump and Fed Chair Jerome Powell.

In an on-camera statement Sunday, Powell said the probe is not about the estimated $2.5 billion renovation, but instead an attempt by the president to influence the Fed.

"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," Powell said.

Here is what to know about the inquiry.

What's the basis of the investigation?

Powell said the DOJ served the Fed with grand jury subpoenas Friday and threatened a criminal indictment related to his testimony before the Senate Banking Committee last June.

Early in that testimony, during which he delivered the Fed's semiannual Monetary Policy Report, Powell discussed the renovation of the central bank's Marriner S. Eccles and Federal Reserve Board East buildings. The buildings, erected in the 1930s, have not been renovated since opening.

Powell told senators last year he realized "just how badly" the Eccles building needed renovating when former President Barack Obama appointed him to the Fed board of governors in 2012.

"No one in office wants to do a major renovation of a historic building during their term in office," Powell said. "You would much prefer to leave that to your successors, and this is a great example why."

The project, initially estimated to cost $1.9 billion, began in 2022. It includes the removal of asbestos and lead, the replacement of "antiquated" electrical, plumbing, heating, ventilation, air conditioning and fire detection and suppression systems and work to bring the buildings "up to modern code," according to the Fed's website.

But the cost of the renovation has risen to $2.5 billion, with the central bank citing changes to the designs of the buildings, higher costs for materials, equipment and labor than initially projected and "unforeseen conditions," such as more asbestos than anticipated, toxic soil contamination and a sinkhole.

What's the reaction from lawmakers and Wall Street?

News of the investigation triggered bipartisan backlash, with both Republicans and Democrats accusing Trump of politicizing the Justice Department and attacking the Fed's independence.

GOP Sens. Thom Tillis (N.C.) and Lisa Murkowski (Alaska) said they would oppose all Trump Fed nominees while the investigation is ongoing, imperilling the president's plans to replace Powell.

"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 wrote in a statement Sunday evening.

Even some of Powell's fiercest congressional critics have stood behind him and condemned the investigation.

"Trump wants to nominate a new Fed Chair AND push Powell off the Board for good to complete his corrupt takeover of our central bank. He is abusing the law like a wannabe dictator so the Fed serves him and his billionaire friends," said Sen. Elizabeth Warren (D-Mass.), who opposed Powell's renomination and previously called him "dangerous."

Financial markets, however, reacted with much less alarm.

Stocks were mostly flat by noon Monday after a mild morning selloff. While prices for precious metals were still up during the afternoon, some Wall Street veterans were surprised by the lack of a bigger swoon.

"No one is panicking, to a large extent, because we've had this never-ending rally going on for a long period of time," said Dan Alpert, managing partner at Westwood Capital, a New York investment firm.

"If this had happened a year ago, or when Trump first came to office, or anywhere around that time, the markets would be going haywire. But they are numb at this point."

Why is Trump unhappy with Powell over interest rates?

Trump, who criticized Powell throughout his first term, has ratcheted up his rhetoric towards the Fed chair over the last two years.

During his most recent presidential campaign, Trump suggested the central bank's September 2024 rate cut was politically motivated and an attempt to increase the chances of former Vice President Kamala Harris winning the election. Powell, like previous Fed chairs, has insisted that the Fed does not consider political circumstances when deciding on interest rates — only economic data.

In his first months back in office, the president slammed Powell for not backing a larger or earlier rate cut. Interest rate decisions are made by the 12-member Federal Open Market Committee (FOMC), with a majority required to set policy.

The Fed cut rates by 0.25 percent at each of its last three FOMC meetings, with the current federal funds rate range between 3.50 and 3.75 percent.

Prior to that trio of cuts, Trump berated Powell numerous times, calling him a "numbskull," "a dumb guy" and "an obvious Trump Hater."

Why are people worried about this?

Experts fear Trump's campaign against the Fed and Powell could destroy the central bank's independence to set interest rates based on its views of the economy.

The Fed typically cuts interest rates and keeps them at lower levels to stimulate a weak economy, and raises them to higher levels when prices are growing too quickly.

But a Fed driven by a president's political whims could cut rates or keep them lower than appropriate, risking an inflationary spiral that lasts long beyond the next election.

"The DOJ investigation may be seen by investors as another blow to Fed independence. We think it will be hard for Trump's Fed nominee to convince markets that he or she is making the decisions without being influenced by Trump," wrote Ian Katz, director at research firm Capital Alpha Partners, in a Monday analysis.

What happens next?

The result of DOJ's investigation will determine how the rest of the saga unfolds.

Charges against Powell would spur a long, costly and potentially destabilizing legal battle over the Fed's future. If the DOJ decides not to pursue charges against Powell, attention will turn back to Trump's eventual nominee to replace him and how they fare in confirmation hearings.

Until then, Trump will remain locked in a stalemate with Powell and may be blocked from making any additional mark on the Fed.

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Tillis alone could prevent any Trump Fed nominee from moving to a full confirmation vote through the Senate Banking Committee. Broader opposition from Senate Republicans could prevent GOP leadership from circumventing the committee to approve Trump's nominees, locking in the current Fed slate for months on end.

"Tillis has long-held views about the importance of Fed independence, has defied Trump before and isn't running for re-election. It's unclear how many other Republican senators will stand with Tillis," Katz said.