Sawt Falasteen - US prosecutors open probe of Fed chief, escalating Trump-Powell clash

In an extraordinary statement released in text and video on Sunday, Powell took aim at the "unprecedented action" from the Trump administration, saying the Fed received grand jury subpoenas and threats of a criminal indictment relating to his Senate testimony in June.

The issue at hand was a $2.5 billion renovation project at the Fed's headquarters, which Trump has repeatedly attacked Powell over. Last year, the president floated the possibility of firing Powell over cost overruns relating to the historic buildings' facelift.

Powell dismissed the latest moves as "pretexts," saying: "This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings."

"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," he added.

Trump has repeatedly attacked Powell, calling him a "numbskull" and "moron" for the Fed's policy decisions and not cutting borrowing costs more sharply.

Powell warned: "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."

Investors reacted warily Monday as financial markets opened, with the dollar falling against major currencies while safe-haven assets like gold surged.

Major US indexes pulled back as trading started.

The independent Fed has a dual mandate to keep prices stable and unemployment low. Its main tool is setting a benchmark interest rate that influences the price of US Treasury bonds and borrowing costs.

The Fed's independence from political influence is considered vital for investors.

"If the Fed acts on politics rather than data, foreign investors could pull back on financing the US debt and seek new safe havens," said economist Atakan Bakiskan at German investment bank Berenberg.

- Serious consequences -

Powell was nominated Fed chairman by Trump during his first presidency, but has come under growing pressure from the US leader to slash rates aggressively.

Trump maintained Sunday that he had no knowledge of the Justice Department's investigation.

"I don't know anything about it, but he's certainly not very good at the Fed and he's not very good at building buildings," NBC quoted Trump as saying.

The consequences of the Fed coming under Trump's control would be "pretty serious," said David Wessel, a senior fellow at Brookings.

Elected politicians could be inclined to set interest rates low to boost the economy ahead of elections, whereas an independent Fed is seen as shaping policy in the best interests of managing inflation and maximizing employment.

If Trump succeeds in influencing the Fed, the US economy could see "more inflation, and the willingness of global investors to lend money to the Treasury will diminish somewhat," Wessel told AFP.

While Powell's term as chair ends in May, he could stay on the Fed's board until 2028. The Trump administration's move could be seen as an effort to oust Powell before then, he noted.

It remains to be seen if the criminal investigation will trigger enough backlash -- from lawmakers and the markets -- for the Trump administration to back off.

For now, it has drawn criticism from senators on both sides of the aisle.

"It is now the independence and credibility of the Department of Justice that are in question," Republican Senator Thom Tillis said.

He vowed to oppose the confirmation of any Fed nominee, including for the next Fed chief, until the legal matter is "fully resolved."

Top Senate Democrat Chuck Schumer called the probe an assault on the Fed's independence.

O.Salim--SF-PST