The Federal Reserve (Fed) has received grand jury subpoenas from the Justice Department regarding Jerome Powell’s June congressional testimony about renovations at the Fed’s headquarters, ABN AMRO's Senior Economist Rogier Quaedvlieg reports.

Powell defends Fed independence amid political probe

"Last year, it became apparent that the Trump administration viewed these renovations as a potential way to challenge Chair Powell. In a video statement last night, Powell emphasized that 'the threat (…) is a consequence of the Federal Reserve setting interest rates based on our assessment of what will serve the public, rather than following the preferences of the President'. Meanwhile, Trump denied any knowledge of the investigation. A subpoena marks the beginning of an evidence-gathering process. This is an investigation, which may conclude without charges. If an indictment does occur, it will likely follow the precedent set by the Lisa Cook case, likely reaching the Supreme Court and taking considerable time."

"Attorney General Pam Bondi has instructed various offices to investigate possible taxpayer abuse. The Fed’s renovation costs have increased from $1.9 billion in 2023 to $2.5 billion. In his June testimony, Powell attributed the overruns to higher costs for materials, equipment, and labour, as well as unforeseen issues like toxic contamination. They are not due to claimed extravagant features, like say, a golden ballroom. Overall, the charges appear highly political, and it seems unlikely that this investigation will find any damning evidence. Powell has responded forcefully, calling the subpoena what it is. The timing suggests this may relate to his potential continued presence on the Fed’s board of governors after his term as Chair, which is crucial for Trump’s influence over the board. This situation increases pressure on Powell to step down."

"If anything, this challenge to the Fed’s independence could prompt the FOMC to take a slightly more hawkish stance to defend the institution. The latest labour market report can reasonably supports holding rates steady for now. Our base case remains a pause in January, followed by quarterly 25 basis point cuts starting in March. However, if the situation drags on, rate cuts may be delayed."