GM. This is Milk Road Macro, the newsletter as tense as two people fighting over the thermostat… but it’s Trump vs Powell and the thermostat is the entire economy.
Here’s what we’ve got for you today:
- ✍️ Everything you need to know about the Trump vs Powell showdown.
- 🎙️ The Milk Road Macro Show: Trump vs Powell: The Battle That Could Break the Fed w/ James Lavish.
- 🍪 Q4 earnings season is kicking off.
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EVERYTHING YOU NEED TO KNOW ABOUT THE TRUMP VS POWELL SHOWDOWN
The Federal Reserve and its Chair Jerome Powell are under criminal investigation.
President Donald Trump has continuously attacked Powell for resisting his demands to slash interest rates.
Trump wants lower rates - and he wants them now.
And on Sunday, it emerged that an investigation has been opened into the central bank’s lavish renovation of its Washington headquarters.
This also includes whether Powell lied to Congress about the scope of the refurb project.
The question at the core of this story is whether these developments are solely about the renovation project - or whether they are actually about the Trump administration attempting to wrestle control of monetary policy away from the Fed.
So, what’s going on?
Why is the investigation taking place?
Why are former Fed chiefs attacking the investigation?
And what does it all mean for asset markets?
Let’s take a look…
So, what’s happening?
The Federal Reserve has been served with grand jury subpoenas from the Justice Department threatening a criminal indictment.
The U.S. attorney’s office in the District of Columbia has opened a criminal investigation into Powell - looking into cases of potential taxpayer abuse.
Trump said that the DOJ's Fed subpoenas have "nothing to do with interest rates" and denied any involvement in the legal matter.
But Powell disagrees.
In a striking public response, Powell - who has historically ignored public commentary on Trump's public assaults - issued a forceful statement.
He said the action was related to his June congressional testimony on ongoing renovations of the Fed’s headquarters (he didn’t outright deny that his testimony wasn’t truthful).
But he added that "this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure”.
Powell 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. 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.”
So, why is the investigation taking place?
The criminal investigation surrounds a $2.5B refurbishment of the Fed’s headquarters in Washington.
The project is set to cost $700M more than previously expected.
Russell Vought, director of the Office of Management and Budget, has compared the costly renovation project to “the building of the Palace of Versailles in France” and described the cost as "outrageous".
The project includes potentially lavish features including VIP elevators, rooftop gardens and marble floors.
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EVERYTHING YOU NEED TO KNOW ABOUT THE TRUMP VS POWELL SHOWDOWN (P2)
Why are former Fed chiefs attacking the investigation?
Some people think an investigation into potential misuse of funds is the right thing to do.
But in an extraordinary reaction, all living former Fed chairs rallied together to hit back at the investigation and support Powell.
Former Fed Chairs including Janet Yellen, Ben Bernanke and Alan Greenspan signed a statement blasting what they called an "unprecedented attempt” to undermine Fed independence.
They wrote:
“This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation.”
What does it all mean for markets?
These developments could have big consequences for asset markets - because it may be yet another sign of the Trump administration attempting to gain more control over monetary policy - a direct attack on perceived “Fed independence".
Top Goldman Sachs trader Rich Privorotsky believes the developments may lead to “higher long-term Treasury yields, higher gold/metal prices and a modestly weaker dollar”.
So far, since the announcement of the investigation on Sunday, all three of these things are true - although, only to a modest extent.
Privorotsky added that the most surprising thing is not the criminal investigation itself - but “the fact that the Fed appears to be fighting back”.
Senior economist at ABN Amro, Rogier Quaedvlieg, believes the developments “reduce the chance of near-term interest rate cuts as officials look to defend the Fed’s independence”.
He added that "if anything, this challenge to the Fed’s independence could prompt the FOMC to take a slightly more hawkish stance to defend the institution”.
On Powell’s incoming successor, Quaedvlieg said “it makes the appointment of the next Chair a lot more difficult" because as a result of "this blatant attack on Fed independence any nominee will be even more clearly seen in this light”.
The Bloomberg Economics team explored how attempted political control of the Fed could affect the U.S. economy.
They wrote:
“If monetary policy is set by politicians, there’s a temptation to juice the economy ahead of elections, including the 2026 midterms that will determine whether Trump ends his term with a pliant Congress or a divided one. Enjoy the benefits of higher employment and growth now, and deal with the soaring inflation and painful corrections later. In that world, everyone other than the meddling politician is worse off.”
Wrapping up
This story is fantastic for gaining headlines and fostering debate.
Of course, there are legitimate questions over the role of the Fed, its perceived independence, and how monetary policy should be decided.
But how much do these new developments actually matter for markets?
We already know Powell will be replaced in May when his term as Chair ends.
We already know that Trump wants lower interest rates, and is likely to pick a “more dovish” replacement.
And we already know that Trump has been putting maximum pressure on the Fed to lower rates for months.
In the grand scheme of things - I’m not sure these new developments matter a whole lot to markets, particularly in the short-term.
And so far, any direct market reaction has been muted.
Probably the biggest question is whether Powell will remain on the Fed board after his term ends in a few months.
Powell has the option to stay as a Governor and voting member, or leave the Fed entirely.
Speculators on Kalshi think the recent developments make it more likely that Powell will remain at the Fed.
The Trump administration will want him gone completely - but he could stick around if he wants to.
That’s it for this edition - catch you in the next one.
TRUMP VS POWELL SHOWDOWN 🔥
In today’s episode, we sat down with James Lavish to talk about the escalating political clash with the Fed and why it matters for markets, liquidity, and risk.
Here’s what you’ll hear:
- Why political pressure on the Fed has intensified and how the subpoena threat fits into a bigger monetary fight.
- How rate cuts can still push long term yields higher and what that means for mortgages and Treasury issuance.
- Why central banks are buying gold, stablecoins matter for Treasuries, and trust in the dollar is being tested.
- The liquidity signals to watch next, from SOFR stress to the risk of QE lite turning into full QE.
Tune in and see for yourself 👇
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