How the Powell Probe Could Blow Up Trump’s Fed Plans

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1:50Bloomberg Audio Studios. Podcasts, radio, news. He's billions of dollars over budget, so he either is incompetent or he's crooked. I don't know what he is, but he certainly doesn't do a very good job. On the verge of naming his own Federal Reserve chief, the Trump administration has taken one more shot at the person in the job now, and in the process maybe triggered a Washington backlash that could derail his whole campaign to tighten control over the central bank. We're recording this on Tuesday morning, Washington time, And that is all that everybody in D.C. and financial markets is talking about.

2:29The administration's renewed attack on Chairman Jay Powell and the Fed matters because, for better or worse, America's central bank is still the central cog around which much of the global financial system revolves. If it's under attack, then, to some extent, the global system looks less secure. But that part of the story we'd heard before. What's new is that the broader reaction to this latest assault from Republicans in Congress and even some of the president's own cabinet may just have revealed a red line, a constraint on the relentless expansion of presidential power since Donald Trump returned to office last year.

3:08Oh yeah, and it also turns out there's a limit to Jay Powell's patience. 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.

4:05I'm Stephanie Vlanders, Head of Government and Economics at Bloomberg. Welcome to Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next.

4:20President Trump took his fight against Federal Reserve Chair Jay Powell one step further this week when federal prosecutors began investigating Powell for his role overseeing renovation work being done on the central bank's headquarters. What was different this time, as I've mentioned, is that Powell got mad and almost simultaneously so did senior Republican lawmakers on the Senate Finance Committee. One way or another, that reaction from senators and from Powell himself could make it a whole lot harder for the president to put more of his people in charge of US official interest rates. It could also make it more difficult for the people who are there now to support the lower interest rates the president so wants to see, even if the economy's calling for it.

5:09So, possibly not such a bright move on the administration's part, which might be why the president is distancing himself from the Department of Justice's decision to serve those subpoenas, why even the Treasury Secretary, Scott Besant, has said he disagrees with them. A lot to unpack there. Joining us to discuss it all from D.C., senior Washington correspondent Saleha Mohsin, author of Paper Soldiers, How the Weaponization of the Dollar Changed the World Order. Welcome, Saleha, at short notice. Thank you very much. Great to be here, Stephanie. And Trumponomics regular and former Fed official, Anna Wong, Chief U.S.

5:46Economist for Bloomberg Economics. Anna, always great to have you. Great to be here.

5:58So, Leia, let me start with you. This effort by the Department of Justice, which obviously we're reading as yet another kind of assault on the Fed and on Chairman Jay Powell in particular. How quickly has that unraveled and what surprised you about the last few days? I found it very surprising that senior White House officials were shocked by the subpoena from the DOJ. Any president, particularly President Donald Trump, has his own governing style. He likes to be the one making the decisions. He doesn't like those kinds of surprises, but it seems like his officials, his staff now are trying to, I don't know, maybe impress him by taking action unilaterally and say, hey, look what I did for you.

6:46And this one has supremely backfired. I thought it was really surprising that Trump said to NBC News, he did not know about this. Now, there's a few ways to read that because at the end of December, Trump did say, oh, I might file a lawsuit against Jay Powell. Maybe he had heard it might be coming, but it seems very clear that senior White House officials, plus Donald Trump, did not give a final sign-off to this action. He has often, after the fact, distanced himself from some of these slightly more contentious things that the DOJ has done. But you think this goes beyond that? They genuinely were surprised.

7:23I do. I think it's reasonable and appropriate to apply that kind of skepticism when you hear that from anyone in power. Always question what they knew when they knew it. But in this situation, Trump has such a keen eye turned toward what he wants to do with the Federal Reserve. He talks about it frequently. He likes to tease it out. He has really enjoyed this apprentice-style public auditioning process for the Fed chair. He likes the attention. He likes that markets are so curious, hanging on each and every turn. He would not want to take his eye off the ball, particularly when it comes to markets.

7:56He really watches how markets move. He understands these things. He talks to CEOs, bank CEOs, industries, other companies. He knows that this is a big one. And his officials, his senior economic team, they also know how keenly he's watching this. You wouldn't see Treasury Secretary Besant take a step like this without making sure that the commander-in-chief knew. And indeed, Scott Besant has, apparently, at least we're hearing from Axios and others, he's said that he thinks this is a mistake. Yeah, he told Trump, according to Axios, that this whole thing has messed up the somewhat organized process that he had put in place to keep markets calm, to keep Trump focused on the larger target when it comes to choosing a Fed chair replacement for Powell coming up in May.

8:39Since June, we've seen a somewhat organized process of we have 11 candidates and then it's going to be whittled down. He's been communicating everything, working pretty much in lockstep with Trump. And then Pulte comes in and orchestrates a firing of Lisa Cook when Scott Besant is not in town. That's a matter of public record. And also, what you can piece together from what we know publicly, on Friday when the DOJ sent the subpoena notices, Besant was in Minnesota. So once again, he was not in town when this move happened. He found out later. And we should explain who Bill Paltier is. So Bill Paltier is the Federal Housing Finance Agency Director.

9:18It is not usually such a public role. It's not a senior cabinet officer level, like a commerce or treasury secretary type role. But he has really come out as this bulldog for Trump on a lot of issues from housing affordability and obviously the Federal Reserve. and this is kind of how Trump works. He likes to have his bulldog there, a disruptor. Trump, for a long time, we've been hearing from sources that he really likes Pulte, no matter how much havoc he's wreaking, how mad Besant might get at Pulte. Let's just remember that Besant, a couple of months ago, had a run-in with Pulte over housing policy and a couple of other things where maybe he was stepping on Treasury's toes and Besant said, let's step outside, I'm gonna beat you.

10:03So it's a tense relationship, But Trump enjoys this kind of theater. Anna, I couldn't help thinking of you as a pretty longtime Fed official in various capacities before you came to us. What do you think when you saw that really unprecedented video message from Chair Powell the weekend? I thought that the Trump administration's DOJ probe has awakened the dragon. Powell has a usually very calm demeanor. He doesn't get ruffled by a lot of things. He was pretty restrained last year when they were touring in their hard hats, touring the renovation, and Powell was picking Trump up on his numbers. So the 2.7 is now 3.1.

10:48I'm not aware of that. Yeah, it just came out. You're including the Martin renovation. You just added in a third building is what that is. That's a third building. It's a building that's being built. No, it was built five years ago. It's part of the overall work. Just looking at the past year, he has refrained from commenting or pointing out that the administration interferes into monetary policy. But this time you could see that he has lost his cool. And, Saleha, the story we had today was that the whole effort was going to potentially derail the president's efforts, in part because this is going to make it much less likely that the current chair, Jay Powell, leaves his place on the board when he stops being chair in May.

11:39That's what we're hearing from really anyone who knows Powell well or is close to him. We had our own columnist, Bill Dudley, former New York Fed chair, say that on Bloomberg in the last day. Is that your belief? Yeah, you know, and this is something that administration officials are also worried about. All last week, I was hearing from officials and sources, people inside and outside the administration, that what if Powell doesn't leave? He hasn't said he's going to step down in May. Traditionally, a chair will announce it. He will actually step aside. inside Powell had this one piece of leverage and he has used it, it seems, in ways that the Trump administration didn't quite foresee.

12:19And maybe Powell himself didn't see just how important and significant it was to just keep that to himself. Looking at the tea leaves, talking to people close to Powell, it seemed like he would leave in May. He was just kind of holding that little card in abeyance in case he needed to play it. And now not only could he play it, The subpoena could backfire so significantly that not only could Powell decide, oh, fine, I'm going to stay. I can sit quietly in my office at the headquarter, not oversee any big subcommittees. I'm not the chair. And I can just go in on FOMC meetings and cast my vote and make sure I'm a guardrail against any political interference.

12:56He could also end up staying chair for longer because we're hearing now from Congress. They are finally standing up. We heard from Senator Tillis. it was pretty significant that he said he will not confirm Trump's chair pick unless this is resolved. We've heard from French Hill on the House side and other senators on the banking committee that are Republicans saying and realizing they need to protect the Fed. So if there is no chair that has been confirmed by the Senate, that means Powell stays on until there is one. And Anna, do you also think this is going to make him less likely to leave in May?

13:31I thought that there are two paths that this could play out. Not leaving in May is potentially one, but not my baseline. And the second one, rather, is that I think the more consequential, unintended consequences of this is that Chris Waller could be on the ascendance as the next Fed chair. That's Chris Waller, who's been on the board of governors since 2020. And he's considered to be one of the three main candidates for the chair position. That's right. And why I didn't think that Powell would leave, he's just tired. He has been at the Fed since 2012. You could tell in the video that on one hand, you can see outrage, anger.

14:15But on the other hand, there is weariness. He's just not the kind of confrontational person who would sit in a boardroom and in every meeting and just passively sabotage the next person. He's just not that type of person. He's either going to openly fight or leave. But on the other path, why I think Chris Waller is ascendant is that given the voting situation that in the Senate we have, the number of Republican voices from the Senate that has said that they are potentially going to oppose any confirmation of Fed chair nominees suggests that the person who now who can get through and whose views aligned with Trump and who the financial market really respect is Chris Waller.

15:03And also, if it were Chris Waller, Powell would probably be resigned to leave, knowing that the Fed's independence would be safeguarded for sure.

15:18Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

16:00That's Vanguard.com slash audio. All investing and subject to risk, Vanguard Marketing Corporation Distributor.

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17:10Saleha, it seems odd that he would stop being chair but still be on the board. Remind us how that works and how many places the president theoretically had to play, you know, places he was potentially going to be able to fill on that key committee in the Fed and how this might be affected. Looking at tradition, yes, it would be odd for a Fed chair to no longer be chair, but hold on to his governor's seat. But that's not the weirdest thing that's happened in 2026 in the first two weeks. And I guess we should say people come into their positions as governors, and that's kind of independent of the role they hold.

17:45So if they have to be on the board to be a vice chair of Banking Sufficient or to be the chairman of the whole Fed, but their sort of seat as governor operates separately and on a different timetable, I noticed there's also Michael Barr. He's not technically supposed to finish his term until 2032. He was expected to also go this year, but there's some question that he would stay for similar reasons. Right. Even you see the seat that Stephen Myron, who is on leave from the White House as head of the Council of Economic Advisers to Trump, as a Fed governor, filling a seat left empty by Adriana Kugler when she resigned under some ethics cloud back in August.

18:26That term expires in a couple of weeks, and he could roll over and stay or be reconfirmed. Powell's seat right now as governor, he has another two years, but his time as chair expires in May. Of course, he could stay if there is no sitting chair. If you look at the rest of the board, Michelle Bowman, Chris Waller, both were nominated by President Trump earlier during his first term. Lisa Cook, we will hear whether the Supreme Court will uphold her bid to stay on the board. Otherwise, that's an open seat. We don't know what will happen to the Stephen Myron seat, if he will be asked to stay in that slot or if that becomes the Kevin Hassett slot.

19:06And then, of course, the whole administration, including Trump, are just wondering, do we also get the Powell slot to fill? This threat from Senator Tom Tillis, which I noticed came out almost moments after his statement came out moments after the Fed released its video, which to those on the outside looked a bit like coordination, but who could possibly comment? But that threat to not confirm any new Trump nominees to the Fed until this potential criminal case is resolved, how seriously do you take that? We haven't had a lot of fighting back by Congress in the last year. No, we really haven't.

19:44And Trump doesn't seem to care about Congress, and he's been able to steamroll them on a lot of things, including possibly his activities in Venezuela. But what we're seeing is Tillis, yes, he came out very quickly, very strong. It was a big deal, but just a reminder that he is retiring. So yet another politician who has, you know... Terribly brave as they go out the door. Yes, I was going to use another phrase that probably isn't for air, but very brave for standing up to Trump. Okay, let's take it. Who we haven't heard from yet is Senator Tim Scott. He is the chair of the Senate Banking Committee, a powerful Republican in the Senate.

20:18He hasn't said anything that's not completely uncharacteristic. He does tend to stay kind of mom on issues, but Tillis will need some support. But even others who, as they say, they have disagreed with Powell and think he's a terrible chair still say, oh, but I don't think he's a criminal. And then we heard from House Republican French Hill. And sure, he doesn't have a role in confirming the next chair or Fed personnel, but he has a very strong voice on the Republican side. And he said, this isn't what the Fed needs to be focused on. Is someone going to be indicted and thrown into jail? They should be focused on the economy.

20:56Anna, of course, one of the key goals that the president has in this whole effort, one is to just control the Fed as much as he can. but in theory it's also a means to the end of lowering interest rates. So how does this potentially affect that decision? Because it did seem like things were kind of falling into place, lower interest rates this year, regardless of who was head of the Fed. So does this make things difficult for people who are making that decision inside the Fed, whether they're appointed by President Trump or not? Yes, definitely. Before this incident, the data was cooperating, right?

21:38So, for example, we just had a CPI release, which was surprisingly low. This is following another CPI report that's very low. And Powell himself said in December that he expects core goods prices to peak in the first quarter and for tariff pass-through to have peaked. So inflation is definitely improving. And on top of that, we have a productivity boom that's happening in the second half of 2025. We estimate that non-farm productivity is likely going to be run at a pace on average of 5%. And that basically helps with the inflation trajectory as well. So if everything just let the data play out, long-term rates would have declined this year.

22:27And now, if the administration won't back down from this attack, there's a risk of risk premium rising on the perception that Fed independence is being eroded. And also, internally, there might be some fears that this kind of assault could broaden to other Fed FOMC officials who are perceived as hawkish. Just to sort of unpack that a little bit. So you're saying whoever's the Fed, and we know there will be a new Fed chair, whatever else happens, and they will be appointed by President Trump, and there will have been all of this lead up to that appointment. It becomes harder for them to convince the financial markets that they're doing something for the right reasons when they cut rates.

23:16And long term interest rates could still be higher, even though they've cut short term rates. But you're saying there's that credibility problem with the markets, but there also is potentially a credibility or a persuasion problem internally with Fed officials. That's right. And how much do you think they're feeling that now? You've talked on previous programs about how important it was going to be for, say, Kevin Hassett to spend a few months doing the hard work internally to bring people around. Do you think that is just now a lot harder? Well, in the scenario where Powell stayed on long after his May expiration as chair, I think it will be harder even for Powell.

23:56And Powell has played a critical role in the lowering of rates last year. Had it not been for his leadership, we would not have seen that 25 bps cut in December. So Powell is trying to do the data-dependent objective thing, as opposed to, you know, the majority of the FOMC who are hawkish and who are regional presidents, who despite the data are leaning on concerns about upside risk to inflation. So I think this incident makes it harder for Powell to play that role that he has been playing in the last year. So basically, the administration is taking out a dove. That is interesting. So you think interest rates are lower now than they would have been under another chair?

24:43Yes. Yes. Because other chairs might well have been more concerned about the inflation risks. Yes, that's right. It's either Powell, Waller, Bowman or Steve Myron. These are the four doves on the committee. And out of these four, Powell and perhaps Waller have the soft power to persuade the other hawkish regional Fed. And so now this formula is broken down. Powell has lost his cool. So what's up in the air is whether he can still be that really objective, honest broker between the hawkish and the dovish folks on the committee, or would he rather be like, I have had it. I'm going with the hawkish faction because right now we need to safeguard the optics of Fed independence, even if the data would have pushed him to cut further.

25:36Finally to you, Soler, we're focusing on the independence of the Fed and what it means even for monetary policy, which is what we should do because we're Trumponomics. But I did mention at the start that for many people, this is also about a kind of broader question of are there going to be any limits to presidential power in this administration? And are there red lines that the president finds he can't cross in trying to extend his purview as president? over the months when I've talked to people even inside the Fed, they see themselves as partly that this battle is about the independence of the central bank, but also about kind of the rule of law in the U.S.