US Dept of Justice probe into Fed chair sparks backlash

The investigation was revealed late on Sunday, US time, when Powell said the Fed had received subpoenas from the Justice Department.

It was approved and started by Jeanine Pirro, the US Attorney ​in Washington and an ally of President Donald Trump, according to two sources with knowledge of the investigation.

Neither Attorney General Pam Bondi nor Deputy Attorney General Todd Blanche was briefed about the decision to subpoena the Fed last week, one of the sources added.

The threat of indictment, ostensibly focused on comments Powell made ⁠to Congress about a building renovation project, sent rates on longer-term US Treasury bonds up, as investors parsed what a less independent Fed could mean for inflation and monetary policy.

If amplified, such a market reaction could constrain Trump's efforts to reshape the Fed, considered the most influential central bank in the world and a cornerstone of the world financial system. 

A rise in long-term borrowing costs could also backfire against Trump's efforts to address broad concerns about "affordability".

On Monday, former Fed chairs Janet Yellen, Ben Bernanke and Alan Greenspan joined with former government economic policy leaders from both political parties in raising the alarm. 

"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 wrote. 

Global central bankers including the chiefs of the French and Canadian central banks publicly offered solidarity.

US Republican Senator Thom Tillis, a member ‍of the Senate Banking Committee that vets presidential nominees for the Fed, called the move a "huge mistake" on Sunday and said he would oppose any Trump nominees to the Fed, including whoever is named to succeed Powell as central bank chief, "until this legal matter is fully resolved".

He was joined on Monday in condemning the development by fellow Banking Committee member Kevin Cramer and Senator Lisa Murkowski, who wrote on X that "the stakes are too high to look the other way: if the Federal Reserve loses its independence, the stability of our markets and the broader economy will suffer".

Senator Cynthia Lummis, one of Powell's more strident critics usually, on Monday said the Justice Department's use of a criminal statute looked like a "heavy lift" and that she did not see any criminal intent.

"We need this like we need a hole in the head," quipped Senator John Kennedy, also on the banking committee.

Treasury Secretary Scott Bessent told Trump ​on Sunday the investigation "made a mess" and could be bad for financial markets, Axios reported on Monday, citing two sources.

The rise in longer-term rates notwithstanding, ‌market reaction was relatively muted. Gold hit a record high and the dollar fell. 

Major US stock indexes notched record closing highs after gains from artificial intelligence stocks and Walmart.

Powell - who was nominated by Trump to lead the Fed and confirmed in 2018 - will complete his term as Fed chief ‍in May, but is not obligated to leave its board until 2028. 

The subpoenas from the US Justice Department last week pertained to remarks Powell made to Congress over cost overruns for a $US2.5 billion (A$3.74 billion) building renovation at the Fed's headquarters, and threatened a criminal indictment.

Powell said his testimony and the renovations were 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.

Trump told NBC News on Sunday he had no knowledge of the Justice Department's actions. 

"I don't know anything about it, but he's certainly not very good at the Fed, and he's not very good at building buildings," Trump said of Powell.

Australian Associated Press