Former Fed officials: Markets still trust Fed independence

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• Key Insight:  A panel of former Federal Reserve officials discussed the implications of a probe into Fed Chair Jerome Powell, saying the market’s muted reaction reflected political pushback against a potential indictment.
• Expert Quote:  “Markets think these institutions will be strong enough to withstand these types of shocks.” — Randall Kroszner, former Fed governor.
• What’s at stake: The central question is whether the Federal Reserve can remain independent from political influence. Panelists and lawmakers warn that a forced removal of Powell or Fed Gov. Lisa Cook could undermine confidence in the Fed and its ability to set monetary policy based on economic conditions rather than political priorities.

Former Federal Reserve officials say the market’s measured response earlier in the week to a potential indictment of Federal Reserve Chair Jerome Powell indicates confidence remains in the central bank’s independence from political influence.

Speaking at an event hosted by the University of Pennsylvania’s Wharton School, Loretta Mester, former president of the Cleveland Fed, and Randall Kroszner, a former Fed governor, said opposition from allies of President Donald Trump helped ease mounting concerns on Wall Street.

The former officials pointed to comments from prominent Republicans, including Sen. Thom Tillis of North Carolina, a senior member of the Senate Banking Committee, as well as reports that Treasury Secretary Scott Bessent was unhappy with the situation.

“From the press reports, Bessent isn’t pleased by it, and markets haven’t gone haywire because they know that someone is there to tell the president that this is problematic,” predicted Kroszner. “Markets think these institutions will be strong enough to withstand these types of shocks.”

Mester echoed that view, describing the market reaction as muted and attributing it in part to political pushback against the Trump administration.

After months of clashes with the Trump administration over monetary policy, Powell announced in an extraordinary address that an investigation had been launched into his testimony related to $2.5 billion in renovation costs at the Fed’s headquarters. The Justice Department served grand jury subpoenas to the Fed on Friday.

Powell added that the potential indictment is politically motivated and reflects the administration’s desire to exert greater control over monetary policy.

“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. 

During Thursday’s panel, former Fed officials, which also included Patrick Harker, former president of the Philadelphia Fed, and Donald Kohn, a former Fed governor, praised Powell’s response but said the central bank needs to improve its messaging to explain to the public why attacks on the Fed matter.

“A lot of communication is focused on making sure the markets understand what you’re doing, but I think there has to be more emphasis on ordinary people, folks who do not understand what the Fed does,” said Kohn.

Panelists also discussed the case of Federal Reserve Gov. Lisa Cook, saying an upcoming Supreme Court decision on whether she can remain in her role could pose an equal or greater threat to the Fed’s independence.

“I want to emphasize the greatest threat is if the [Supreme Court] decides against the Fed, independence is gone,” warned Harker. 

Kohn said Powell’s speech was significant for Cook’s case. “Jay Powell’s statement was important and to get that out before the hearing of the Lisa Cook case because it surfaced the independence issue and made it clear what is at stake,” the former Fed governor said.

The Supreme Court will hear Cook’s case on Jan. 21 to decide whether the Fed official can remain in her post while her litigation against President Donald Trump, accusing him of illegally attempting to remove her from her role, unfolds in a lower court. Separately, Sen. Elizabeth Warren, D.-Mass., and a group of former financial regulators and economic policy experts held a press call Thursday to discuss how the probe into Powell and Cook’s litigation could affect financial markets and consumers.

Warren warned that if Powell and Cook were forced out, it would open two seats on the Fed’s board of governors, giving the Trump administration a majority.

“A Trump takeover will mean the Fed can set interest rates to please a president who wants to juice the economy ahead of the midterm election, no matter what happens to inflation,” Warren said. “The consequences will hit families hard.”

Warren also said that a Trump-controlled Fed could provide special privileges, including master accounts or emergency loans, to favored companies, including Trump-affiliated crypto firm World Liberty Financial, which recently applied for a federal banking charter.

Former Consumer Financial Protection Bureau Director Rohit Chopra said during the call that a “takeover” of the Fed Board of Governors would likely result in higher inflation and higher interest rates.

“That means consumers will pay more on their loans, small businesses won’t be able to make the numbers work, and taxpayers will pay more as the cost of government debt rises,” Chopra said. “If you care about the cost of living and affordability, you’ve got to care about what’s happening at the Fed.”

Claire Williams contributed reporting to this story.