Ahmed Kamel – Egypt Daily News
The Federal Reserve’s ongoing legal showdown with the Justice Department is sending shockwaves through financial markets and may limit the central bank’s ability to lower interest rates this year, analysts warn.
The dispute centers on subpoenas issued to the Fed and its Chair, Jerome Powell, over past testimony concerning cost overruns in the central bank’s building renovations. Powell and other officials have described the inquiry as a politically motivated attempt to pressure the Fed on monetary policy rather than a legitimate oversight effort.
“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,” Powell said in a rare video statement.
Analysts say the investigation complicates the Fed’s policy outlook. Lower interest rates, which reduce borrowing costs for consumers and businesses, are typically used to support economic growth and the labor market. But uncertainty surrounding the legal inquiry makes officials more cautious, potentially delaying or limiting cuts.
Krishna Guha, vice chairman at Evercore ISI, noted that the subpoenas could increase the likelihood that Powell remains on the Fed’s board even after his term as chair ends in May, in order to safeguard the institution. “The eventual makeup of the committee that sets interest rates will almost certainly result in fewer cuts than would otherwise have been the case,” he said.
JPMorgan analysts went further, predicting that the Fed may hold rates steady throughout 2026, undermining expectations that President Trump could accelerate rate cuts through a new appointee aligned with his policy preferences.
Trump, who nominated Powell as chair in 2017, has repeatedly criticized him for moving too slowly to reduce rates. A slower pace of cuts could affect Trump’s economic agenda, which seeks to lower borrowing costs and stimulate growth.
The legal battle also raises broader concerns about the independence of the U.S. central bank. A loss of credibility could undermine global confidence in the dollar and U.S. economic stability, potentially making imports more expensive and exports less competitive.
“The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine that independence,” a statement from former top U.S. economic officials, including every living former Fed chair warned Monday.
Economists emphasize that central bank independence is essential for sound monetary policy. Decisions influenced by short-term political goals could lead to mistakes that destabilize the economy.
The Fed’s next policy decision is scheduled for January 28, a closely watched date that now carries heightened significance as markets monitor both economic guidance and the fallout from the ongoing legal dispute.
