Why Is the Government Going After the Fed?
Federal prosecutors have opened a criminal investigation into Jerome Powell, focused on his June testimony before Congress about the Federal Reserve’s $2.5 billion renovation of its Washington, DC headquarters.
On its face, this appears to be a narrow dispute over testimony and building costs.
But Powell’s response makes clear that this is about something much bigger.
In a rare and extraordinary public statement, Powell argued that the investigation is not about renovation details at all. Instead, he framed it as retaliation for the Fed’s refusal to bend to political pressure on interest rates. Warning that this move threatens the central bank's independence.
As Powell put it plainly: this is about whether monetary policy is set by economic evidence, or by intimidation.
The Economics: Why Interest Rates Are the Real Issue
To understand why this matters, you have to understand what’s at stake for the administration.
The current policy agenda is heavily focused on affordability, especially housing affordability. Interest rates are a powerful lever in that story. Lower rates mean cheaper mortgages, easier access to debt, and short-term relief for borrowers.
Lower rates also reduce the federal government’s own borrowing costs.
According to the Committee for Responsible Federal Budget, U.S. interest payments on the national debt are expected to exceed $1 trillion per year soon. Cutting rates doesn’t fix the debt problem, but it does make it feel less painful in the short run.
That creates a clear incentive: pressure the Fed to ease.
Central Bank Independence
But the Fed’s mandate is not affordability politics. It is price stability and maximum employment. When inflation risks persist, cutting rates prematurely can destabilize the economy.
Powell’s statement makes that conflict explicit. He argues that the investigation 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.
This is why central bank independence exists in the first place. Monetary policy works only if markets believe it is insulated from political cycles.
Once that credibility cracks, inflation expectations rise, long-term rates increase, and borrowing costs can actually go up, not down.
The Irony
Here’s the irony in all of this.
The administration’s goal, especially President Donald Trump’s long-standing goal, is to push down the 10-year Treasury yield. Lower long-term rates make mortgages cheaper, support housing prices, and reduce the government’s interest burden. Politically, it’s an attractive target.
But this investigation does the opposite.
When markets see political pressure on the Fed, they don’t think “rates will be lower.” They think “inflation risk just went up.”
Why? Because long-term yields are not set by today’s policy rate. They are driven by expectations—especially expectations about future inflation and the Fed’s willingness to control it. If investors believe the central bank may be coerced into cutting rates too early, they demand higher compensation for holding long-term debt.
That shows up directly in the 10-year Treasury yield.
On Monday, long-term U.S. Treasury yields moved higher. The 10-year Treasury rose to 4.20%, its highest level since September 2025. The 30-year jumped even more sharply to 4.862%. Meanwhile, the 2-year yield, which is more closely tied to near-term Fed policy, was essentially flat at 3.532%.
The Bottom Line
This is not really about a building renovation.
It is about whether the Federal Reserve can continue to do its job without fear of retaliation.
Using the Department of Justice to investigate a sitting Fed Chair sends a powerful signal to markets, investors, and foreign governments that monetary policy may no longer be insulated from politics.
If Fed leaders can be pressured out or replaced for refusing to cut rates, future chairs will face the same threat. That would fundamentally change how U.S. monetary policy works.
Markets are watching closely. Central bank independence is one of the pillars supporting the global financial system. Expect a volatile market today, with long-term yields continuing to rise.
Statement from Jerome Powell (Full Text)
Good evening.
On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.
I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve—is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.
This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. 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.
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.
I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment. Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.
Thank you.
I would argue that housing affordability has little to do with the Trump admin’s push here. After all, if slashing the overnight borrowing rate leads the bond markets to expect higher long-term inflation — which would surely make sense to me — then those rates on long-term loans like mortgages wouldn’t fall much, if at all.
Anyways, as you pointed out, markets need to know the Fed is insulated from political pressure. This kind of move is a really good way to introduce the exact kind of uncertainty that upends markets.