On Friday US Federal Reserve Chair Jerome Powell said that the US Department of Justice had served subpoenas to the Central Bank, indicating the possibility of criminal indictment. Powell explained that the indictment related to his testimony before the Senate in June last year concerning the renovation of the Federal Reserve office buildings.
Commenting on this development, Jon Butcher, Senior US Economist, at Aberdeen said;
“The markets’ initial reaction seems to be negative, and we see increased risks of a debasement trade negatively affecting the US dollar, equities and bonds. In particular, the long end of the curve could see increased term premia.
“This also raises questions about the composition of the Fed’s board of governors. The next chair is expected to be named this month, likely taking Stephen Miran’s governor seat, whose term ends on 31 January. But Republican senator Thom Tillis has said he will oppose any nomination to the Fed “until this legal matter is fully resolved”.
“Powell’s own governor seat runs until 2028, and he had been expected to vacate it following the end of his term as chair in May. However, his statement will lead to questions about whether he will stay on as governor to support the independence of the Fed, despite the legal risks.
“Whether or not this legal action has merit, it signals the administration is willing to continue to put pressure on the Fed to drive looser monetary policy. With President Donald Trump also looking at fiscal measures that would increase the deficit, we expect to see further questions about fiscal dominance and an outside risk of yield curve control.”
