Jerome Powell punches back

The LIST of American institutions that have fought Donald Trump is short. It has just grown by one. On January 9th the Department of Justice (DoJ) served subpoenas to the Federal Reserve relating to a probe into the cost of renovating the central bank’s headquarters. The Fed has met earlier attacks with studied silence. Not this time. Jerome Powell, the Fed’s soft-spoken chair, declared with uncharacteristic ardour that the probe was the result of the bank setting policy based on sound economics “rather than following the preferences of the president”.

More remarkable still is what happened next. Mr Trump, seldom a shrinking violet, disavowed involvement in the DoJ’s actions. “I don’t know anything about it,” he told NBC News. Some Republicans in Congress, seldom profiles in courage, objected. They included several members of the Senate banking committee, which approves Fed appointments. One of them, Thom Tillis, said that he would jam up any nominations until the matter was sorted. Another, John Kennedy, remarked that “we need this like we need a hole in the head.”

Former treasury secretaries and Fed chairs of both parties signed an open letter defending the Fed. A dozen foreign central bankers, including Christine Lagarde in the euro area and Andrew Bailey in Britain, signed another. Wall Street piped up. Jamie Dimon, boss of JPMorgan Chase, said that anything that chips away at Fed independence “is probably not a great idea”.

The fracas may also nudge the Supreme Court in a Fed-friendly direction. On January 21st the justices will hear arguments over whether Mr Trump can fire Lisa Cook, a Fed governor, over alleged irregularities in one of her mortgages (she denies the accusations). They may now be more likely to view the attempt to sack Ms Cook as part of a broader assault on the central bank, rather than a quarrel over loan documents. If Mr Trump loses that case, that limits his leverage over the other governors.

The odds are that the president will pick someone pliant to replace Mr Powell as chair when his tenure ends in May. But that person gets only one vote on a 12-strong committee. Most of the current lot owe Mr Trump little loyalty. This week may have stiffened their spines. Mr Powell himself could opt not to vacate his committee post, which he can occupy until 2028, rather than step down as his predecessors did when their term as chair expired.

All this may explain why markets’ reaction to the subpoenas was muted. Precious metals rallied. But equities hardly moved. Crucially, the yields on long-dated Treasuries, which would soar if Fed independence were truly jeopardised, barely budged. Stacking the Fed and yanking interest rates sharply down suddenly looks harder than it did a week ago. ■