Wall Street reacts negatively to Powell probe, credit-card proposal

U.S. stocks dove into negative territory to start the week on Monday after the Department of Justice sent subpoenas to the Federal Reserve as part of a criminal inquiry into Chair Jerome Powell’s remarks to Congress.

The Dow Jones Industrial Average tanked 400 points upon opening before stabilizing a bit. 

Other indexes were down initially, too, after Mr. Powell released a blunt statement Sunday saying the grand jury inquiry was a “pretext” to harass the Fed over its interest-rate decisions.

The Justice Department has not revealed any details about the probe, although Mr. Powell signaled that prosecutors may believe he lied to Congress about the renovations of Federal Reserve buildings in Washington.

“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,” he said.

The unprecedented inquiry is making Democrats and some Republicans squeamish.

They worry that President Trump’s pressure campaign on the Fed over interest rates and against Mr. Powell, personally, will undermine the central bank’s independence.

Mr. Trump told NBC News he did not know anything about the probe. But lawmakers were not buying it.

However, the inquiry might be a bridge too far for the markets.

“Using the threat of criminal prosecution to pressure the Fed over interest rates is a direct assault on that foundation and puts the economic security of millions of Americans at risk,” Sen. Mark R. Warner, Virginia Democrat, said. “Uncertainty and instability can ripple through the economy, affecting borrowing costs and making it harder for families to buy a home, run a small business, or afford everyday necessities like food, fuel, and diapers.”

Former Fed Chairs Ben S. Bernanke, Alan Greenspan and Janet Yellen accused the president of using “prosecutorial attacks to undermine that independence.”

“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 said in a letter signed by 10 other economic officials who served in Republican and Democratic administrations. “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.”

Others said the system itself was to blame for the situation.

“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,” said Jai Kedia, a research fellow at the libertarian Cato Institute.

Stocks were not impacted last year by Mr. Trump’s long-running campaign to pressure Mr. Powell over interest rates – he wants them much lower — and a Fed-building renovation project that is over budget.

Separately, bank stocks were down after Mr. Trump proposed capping credit card rates at 10% for one year. 

The idea is to protect borrowers, but some economists fear it will cause banks to restrict lending.