Has it really come to this? After starting 2026 by capturing the president of Venezuela, this week the US president turned his attention to a target closer to home and of far greater systemic importance; the chairperson of the Federal Reserve.
Donald Trump’s annoyance with central bank independence is neither new nor subtle. To him, monetary policy is a hassle, rather than a constitutional safeguard. Interest rates should be low to keep the costs of the debt payments of his companies down, and the valuations of his worthless crypto scams up.
Yet Jerome Powell has been courageously unflinching in his role as primary guarantor of the value of the US dollar and price levels in the world’s largest economy. The US economy has been running warm, employment is still historically low, and CPI is still above its target level. While he indicated that it is time to start cutting, he is doing it far slower and more cautiously than the White House would like.
On Sunday that irritation took a darker turn. News emerged that the Federal Reserve had been served with grand-jury subpoenas threatening a criminal indictment on the basis that Powell allegedly misled Congress last year in testimony on the ongoing refurbishment of the central bank’s buildings. The White House has for some time muttered about suing the Fed chairperson “for incompetence”. But the leap to criminal investigation is something else entirely.
Powell has made several serious mistakes during almost eight years in office. Leaving rates at zero throughout 2021 as inflation took hold, under the belief that it was “transitory”, was a policy error for the ages. But that isn’t a justification for pursuing a criminal indictment on an unrelated topic.
Months of pressure
Powell has, for the first time after months of pressure, come out swinging.
“Those are pretexts. 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 in a recorded statement on Monday, 12 January 2026.
“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions – or whether instead monetary policy will be directed by political pressure or intimidation,” he added.
He is not alone. On Monday, every living former Federal Reserve chief attacked the Department of Justice’s probe into the central bank head. Ex-Fed chairs including Janet Yellen, Ben Bernanke and Alan Greenspan signed a statement blasting what they described as an “unprecedented attempt to use prosecutorial attacks to undermine [Fed] 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… It has no place in the US, whose greatest strength is the rule of law, which is at the foundation of our economic success,” they said.
It is an interesting allegory, and somewhat out of date – unfair, even. In recent years emerging markets like South Africa and Brazil have become comparative models of sound monetary management. The SA Reserve Bank, under the ever-hawkish Lesetja Kganyago, has even tightened its inflation target, and does not have an explicit full employment target, as the Fed does. Roles have been reversed; one would have to go back to the apartheid era to find a Sarb that was doing the bidding of the government.
As for the substance of the allegations; they are thin, to put it lightly. The cost overruns on the renovations of the two Fed buildings are significant. But the idea that there is criminal misconduct involved is new, and, on the basis of the facts we have now, appears to be a remote possibility, regardless of how the MAGA spin machine will aim to depict it.
Forcing the Fed into keeping rates artificially low is a modern form of debasing the currency. A fiat monetary system rests on a single, fragile foundation; confidence in the future value of its money. That confidence depends on many things, but above all on the credibility of those who control its supply. In a reserve-banking system, the interest rate is the single critical lever. Interfere with it for political ends and the result is conceptually no different from what happened in Ancient Rome when Nero famously reduced the silver content of the denarius while insisting it was still worth the same.
The outcome then is what it is likely to be now. To paraphrase the cliché, it is looking alarmingly like all roads lead to inflation.
Markets oddly relaxed
And yet, for the moment, markets appear oddly relaxed. One might have expected an open assault on the independence of the Federal Reserve – under the guise of a criminal investigation into its chairperson – to produce something closer to panic. Instead, the dollar has hardly flinched. It fell by about 1% against the euro when the news broke, then promptly steadied. Treasury yields across the curve – from two years to 30 – have scarcely moved. The five-year/five-year break-even inflation rate, perhaps the most widely watched measure of long-term inflation expectations, has even drifted slightly lower. It remains firmly within the range it has occupied throughout the escalating quarrel between the White House and the Fed.
Why such sangfroid? There are several possible explanations. First, the market might be betting that the Department of Justice investigation is likely to come to nothing. Powell’s blunt rejection of the threats and the rejection of the allegations by several Republican senators reinforce the point. Second, and more alarmingly, perhaps markets do not actually care about central bank independence until it is tested by a real crisis. Sound monetary policy is rather like having a fire extinguisher; when all is well it seems unimportant and easy to ignore, even to forget where it is. When a fire starts it suddenly becomes indispensable. A single unpleasant inflation print could yet serve as that spark.
For now, however, the market is complacent. That is a mistake. Even if the investigation comes to nothing, the damage has been done and the precedent has been set. The next Fed chair – whoever that may be – will take office under a cloud of implied political conditionality. The institution’s authority, which rests as much on convention and credibility as on law, has been eroded.
Some investors, at least, appear to be awakening to the reality. Gold has risen nearly 3% since the subpoenas were announced and now sits at yet another record high. This is a quiet vote of no confidence in the direction of American governance, and casts further doubt on the long-term viability of the dollar as the global reserve currency.
The Trump administration has not merely quarrelled with a central banker. By throwing the full force of the justice system at Powell it has signalled that the machinery of the state may be used to discipline any institution that stands in the way of short-term political convenience and gain. That is how inflationary regimes are born – not in a single lurch, but in a series of incremental, corrosive steps.
The only hope for markets is that they will not, over the next few years, require the steady hand of a fully credible and united Federal Reserve, as happened under Bernanke in 2008. History suggests that this is a risky bet. Best to keep those fingers crossed. DM