Trump faces extraordinary moment in spat with Fed chair Powell

It is extraordinary enough to see the world’s top central banker make an unscheduled video statement on social media. My first thought upon seeing the post from the Federal Reserve chair Jerome Powell was: “Is this an AI deepfake?”

That sense did not go away as I listened to what were indeed the real words of the world’s most important financial official.

The background here is a long-running spat between President Trump and the man responsible for setting interest rates in the US and indirectly much of the rest of the world.

In theory, this has officially been about the cost of a renovation project at the Federal Reserve, the US equivalent of the Bank of England. The president even took his motorcade over to the Fed’s building to inspect the work.

At the same time, President Trump has attempted to criticise, interfere and influence the highly independent setting of interest rates by Powell, through criticism and the appointment of his own favourite economists. The aim appears to be to try to massage down US interest rates.

In the early hours of this morning, a softly spoken Powell revealed that the Department of Justice (DoJ) had served his institution with criminal indictments over his testimony on the building works. But he also said publicly what he had not before. The “unprecedented” DoJ moves “should be seen in the broader context of the administration’s threats and ongoing pressure”.

Actions over the Fed building were “pretexts”, he said. “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.”

There are unhappy international precedents for this in developing and emerging economies, where independent central bank governors can often be the first to see the wrath of elected governments attempting to shake off the restraints of expert institutions. Think Turkey and Zimbabwe.

Powell said this morning: “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead, monetary policy will be directed by political pressure or intimidation.”

This matters not just technically for American mortgage rates or US markets. Federal Reserve independence is the anchor for stability across global markets. This is not to say they always make the right decisions or are beyond criticism. But Powell is suggesting in clear terms that this is something much bigger than that.

In a different context, during the infamous Liz Truss mini-budget, it was noises from Truss backers raising questions about the Bank of England that contributed to the chaos.

In this context, it is worth watching the key market for US Treasuries, the safe haven asset of choice in times of instability. Will they respond to Powell’s public words, or the threat of criminal action?

It might be argued that Powell’s term is up in May and he will be replaced, probably by a Trump-friendly economist, so does not make a difference. It does raise the stakes however. US interest rates are decided by a committee vote, not just the chair.

There has been some wild talk that the US administration could choose to weaponise some of the Fed’s powerful global markets tools to coerce other countries in its tariff war, including allies. Bluntly, that use of what is known as swap lines, massive dollar funding at times of stress, would not have been possible under Powell. Is that where this is now going?

More broadly it is difficult to detach the Powell intervention from what is going on elsewhere in the US. In recent days we have seen the deployment of militarised immigration police, routine threats the US could acquire sovereign territory from Nato allies, while the Supreme Court is about to confirm if his main economic policy has been illegal.

There are some Republicans in Congress who will feel deeply uncomfortable about this Powell development in particular. The head of a central bank is someone with an alternative pole of power who, by design, must speak truth to power.

Even Powell’s unscheduled appearance might cause a reaction in markets, as occurred when Andrew Bailey spoke to BBC cameras in Washington DC in the middle of the mini-budget crisis.

It is worth noting that the most significant moment of pause in the Trump agenda occurred last April, when the chaotic approach to tariffs fell foul of the global bond markets before the stabilising influence of the Treasury Secretary Scott Bessent took control.

The Powell moment could see a repeat.