Fed's Powell Usually Held His Fire. That's Over Now

The financial world was in a wary mood on Monday over Federal Reserve chief Jerome Powell for two reasons: One was the unprecedented move by the Justice Department to launch a criminal investigation against him, and the second was Powell's unusually aggressive response. Coverage:

• Trump: President Trump denied any advance knowledge of the Justice Department's move to NBC News. "I don't know anything about it," the president said Sunday night. "I wouldn't even think of doing it that way. What should pressure him is the fact that rates are far too high. That's the only pressure he's got."
• Powell: The criminal investigation alleges Powell mismanaged money regarding the renovation of the Fed's headquarters, but Powell dismissed that as ridiculous in his two-minute video address. The investigation is clearly aimed at pressuring him—or the next Fed chief—into lowering interest rates as Trump wants, he asserted, adding that the very credibility of the central bank is at stake. "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."
• Powell, II: The response was "extraordinary," according to a Wall Street Journal analysis, because Powell typically tries to avoid escalating any conflict with Trump in his public remarks. "Powell made clear by releasing the video statement that he wasn't going to let this play out in the shadows," writes Nick Timiraos. If "the administration expected Powell to fold, his video remarks Sunday suggested they had misjudged him."

• Backfire I: A number of economists suggested that the Fed is now less likely to cut rates at its meeting later this month, reports the New York Times. Fed futures suggested the same. And both Bloomberg and the Journal now see it as less likely that Powell will leave the central bank in May when his term as Fed chief expires. He can stay as a governor until 2028, and analysts think he's more likely to do that now rather than hand a vacancy to Trump.
• Backfire II: Politico, meanwhile, sees a potential backfire in a larger context. "Fears by investors and businesses that the Fed will make decisions based on the president's whims, rather than the long-term interest of the economy, could undermine the central bank's credibility as an inflation fighter and drive up longer rates."
• Markets: The Dow was down about 200 points in mid-morning trading, while gold, seen as a safe-haven asset, hit yet another fresh record, per CNBC. Meanwhile, financial analysts were caught by surprise. "We are stunned by this deeply disturbing development which came out of the blue after a period in which tensions between Trump and the Fed seemed to be contained," wrote Krishna Guha of Evercore ISI to clients.