In the ongoing struggle over the independence of the Fed, Trump finally blinked first. His toady prosecutor, U.S. Attorney for the District of Columbia Jeanine Pirro, abruptly announced this morning that she was suspending her investigation of Powell.
This came after a confirmation hearing for President Trump’s nominee to succeed Powell as chair, Kevin Warsh, at which Warsh did himself no favors. Warsh, appointed by Trump to lower interest rates, insisted that he would be completely independent of Trump. Senators of both parties weren’t buying it.
Elizabeth Warren, the ranking Democrat on the Banking Committee, opened by terming Warsh Trump’s “sock puppet.” The name stuck. It was repeated in questioning by Republican John Kennedy of Louisiana, who asked, “Are you going to be the president’s human sock puppet?”
“Let’s check out your independence and your courage,” Warren said. “Did Donald Trump lose the 2020 election?” Warsh ducked: “We try to keep politics out of the Federal Reserve,” he replied.
Pirro, obviously at Trump’s direction, folded her investigation of Powell because Republican Sen. Thom Tillis of North Carolina has said that he would not vote to send Warsh’s nomination to the full Senate until the investigation of Powell ceased.
But Pirro left herself some wiggle room. In her post suspending the investigation, her excuse was that she asked the Federal Reserve’s own inspector general to investigate Powell’s responsibility for alleged cost overruns, adding snarkily, “Note well, however, that I will not hesitate to restart a criminal investigation should the facts warrant doing so.”
So this keeps a gun to Powell’s head and should not be sufficient for Tillis to lift his hold. As Sen. Warren commented, “Let’s be clear what the Justice Department announced today: They threatened to restart the bogus criminal investigation into Fed Chair Powell at any time while failing to drop their ridiculous criminal probe against governor Lisa Cook … The Senate should not proceed with the nomination of Kevin Warsh.”
But at this week’s hearing, Tillis sounded like he really wanted a reason to cave. “You have extraordinary credentials. They’re impeccable,” Tillis told Warsh. “Let’s get rid of this investigation, so I can support your confirmation.
It remains to be seen whether Powell will carry out his threat to keep his seat on the Fed, which is good through January 2028, after his term as chair expires on May 15. If there is any threat that the investigation will be reopened, he is likely to.
Powell is being treated like the savior of the Republic because he is the rare conservative with the gumption to stand up to Donald Trump. At a time when Congress has ceased to be a check on a mad president and the Supreme Court is iffy, Powell seems to epitomize what’s left of checks and balances. As the French say, in the kingdom of the blind, the one-eyed man is king.
But let’s think a little harder. None of this makes Powell a public hero.
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For starters, as Fed chair, Powell has given the banking industry just about everything it wants. He has voted to weaken bank capital standards, giving banks more money to speculate.
In 2018, the Fed and the banking industry wrote and promoted a bill, S. 2155, that weakened regulatory requirements over large regional banks. Under Powell, the Fed removed its own ability to block banks from distributing capital to shareholders if banks demonstrated bad risk management. It also weakened liquidity rules.
And under Powell, the Fed weakened the Volcker rule’s restrictions on proprietary trading and the restrictions on bank investments in private equity and hedge funds.
Now we are at risk of crashes from crypto, AI, and private credit. The Fed needs to be increasing vigilance, not weakening it.
Even on monetary policy, where he wins praise for resisting Trump’s pressure for cheap money, Powell has been far too much of an inflation hawk. As the supply chain inflation caused by the COVID pandemic subsided in 2023 and 2024, Powell stuck to an unrealistic inflation target of just 2 percent and took too long to cut rates.
The current inflation, driven by Trump’s Iran war, is a whole other story. The fact that Powell is right to resist rate cuts in the current circumstances does not erase the fact that he was wrong back then. In that respect, Powell is typical of Fed chairs. Though the law requires the Fed to give equal weight to price stability and high employment, Fed chairs typically care far more about prices than jobs, because very low inflation serves the interest of creditors in the financial industry. And high joblessness is congenial to capital.
The right recipe for the real economy, as opposed to the financial one, is tight regulation and plentiful credit. That way, the real economy can get the financing that it needs. But the Powell recipe is loose regulation and tight credit—good for bankers, bad for the rest of us.
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