The threat to the Fed’s independence isn’t over

President Donald Trump has repeatedly attacked the independence of the Federal Reserve. Friday’s dropping of a Justice Department probe into Federal Reserve Chair Jerome Powell doesn’t fully resolve the threat, though it will clear a path to the confirmation of Trump’s nominee for chair, Kevin Warsh.

“I think we would be foolish to conclude from this that the Fed is out of the woods,” said Lev Menand, a professor at Columbia Law School. 

Warsh has long pledged to keep the Fed independent, including at his nomination hearing Tuesday. But it remains to be seen how he can hold up against a president who has said lowering interest rates was a litmus test for his nominee. Trump isn’t shy about telling normally independent parts of the federal government what to do. The Fed is one of the few holdouts that remain largely outside his control.

U.S. Attorney Jeanine Pirro on Friday said she would drop her investigation into cost overruns at Fed renovation projects and Powell’s testimony about them. Sen. Thom Tillis, R-N.C., has refused to allow Warsh’s nomination to proceed to a full Senate vote while the investigation is pending, because he sees it as a threat to the Fed’s ability to decide interest rates free of political considerations. 

Tillis hasn’t said whether he will drop his resistance now that Pirro has backed off. Pirro said she wanted to see the results of an investigation by the Fed’s inspector general. “I will not hesitate to restart a criminal investigation should the facts warrant doing so,” she said in a statement.

The prospect of Pirro potentially reopening the investigation might give the Fed pause, said Scott Alvarez, former general counsel at the Fed. Pirro’s office told a judge in March it had no specific evidence of wrong doing that could support issuing subpoenas. The Fed will likely want to know what facts might cause Pirro pick the investigation back up again.

“I would guess that the ambiguity in Pirro’s statement might cause Jay to worry about harassment by DOJ after he’s left the Fed,” Alvarez said. The Fed is likely trying to clarify that, he said.

The Fed declined to comment. Warsh didn’t immediately respond to a request for comment. 

“The White House remains as confident as before that the Senate will swiftly confirm Kevin Warsh as the next Federal Reserve Chairman to finally restore competence and confidence in Fed decision-making,” White House spokesman Kush Desai said in a statement.

Trump nominated Powell in 2017 to the chair he now holds, but the president quickly soured on him because he disliked how Powell handled interest rates. During his first term in the White House, Trump considered firing Powell but didn’t take action. 

In his second administration, Trump has gone further. He has berated Powell for not deeply cutting interest rates, which Trump says make it more expensive to finance U.S. debt.

The Fed is charged by statute with setting rates to try to best allow for full employment and low inflation. Countries where central banks have lost their independence, such as Turkey, have seen inflation spike.

Pirro has said she has acted independently in deciding to investigate Powell, but Trump has supported the probe wholeheartedly. He has said he believes there was “criminality” involved in the Fed’s renovation project. 

Trump in August said he was removing governor Lisa Cook from the Fed’s board, alleging she had engaged in mortgage fraud. She has fought those allegations and courts have allowed her to stay in her seat while the case is pending before the Supreme Court. Powell attended the court’s arguments in January on Cook’s case. A decision could come as soon as Wednesday. 

Even if the court allows Cook to remain in place, the president could still later seek to remove Powell. Trump suggested recently he is contemplating doing so, even if Warsh is confirmed as chair. Powell can stay in his separate position as a governor on the Fed’s seven-member board through January 2028. 

“I’ll have to fire him, OK? If he’s not leaving on time,” Trump said in an April 15 interview on Fox Business.

“This has been a concerted effort to provide the administration to exert control over Fed policymaking,” Menand said. “It’s been ongoing for a year, and the administration has pivoted multiple times to different tactics.” 

Trump isn’t likely to give up his interest in the Fed under a new chair. Trump would be disappointed if Warsh doesn’t quickly lower rates, the president told CNBC on the morning of Warsh’s Senate confirmation.

Warsh said at the hearing it will be his — and the Fed’s — decision on where to set rates, regardless of what Trump says. “I do not believe that independence of monetary policy is threatened when elected officials state their views on rates,” Warsh said. “Fed independence is up to the Fed.”

Trump may yet make him prove it.