Will he stay or go? Criminal investigation concludes, Fed Chairman Powell has to make a big decision

Federal Reserve Chairman Jerome Powell is likely entering his final weeks at the helm of the central bank, and now faces the choice of whether to remain at the central bank following Friday’s Justice Department decision.

U.S. Attorney Jeanine Pirro announced in a social media post that she is referring the criminal investigation into the renovations to the Federal Reserve’s headquarters to the central bank’s inspector general, effectively removing the Justice Department from the investigation for the time being.

While the move is significant on the surface, it is even more significant because Mr. Powell has vowed to remain in office until the criminal investigation is resolved.

Now that the decision has been made, he faces a choice: Will he follow historical precedent and leave the Fed, as most of his predecessors have done, or will he stay on for the final two years of his term?

This decision could have important implications for policy-making, especially at a sensitive time.

“Mr. Powell has kept his cards close to his heart, and if the investigation had not been conducted, he would have left the Fed permanently on May 15,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a memo. “However, we believe the Justice Department may have moved too slowly for Mr. Powell to resign on May 15, and that threats to reopen the investigation may not be conclusive.”

In fact, Mr. Guha reasoned, Mr. Powell may remain in office for some time, even if he does not complete his term as president, which expires in January 2028.

President Donald Trump has threatened to fire Chairman Powell unless he voluntarily resigns at the end of his term.

At the heart of the problem is the perceived threat to the Fed’s immunity from political interference. Mr. Trump has been more vocal than any of his predecessors when it comes to attacking the central bank, demanding lower interest rates while threatening to fire Mr. Powell and actively trying to fire Governor Lisa Cook.

Mr. Powell’s successor, Kevin Warsh, has been criticized by some Democrats in Congress as a Trump supporter who threatens to further undermine the Fed’s semblance of independence. Warsh had a confirmation hearing this week, but Sen. Thom Tillis (RN.C.) vowed to hold off on the committee’s vote until the criminal investigation is complete.

“My hunch is that Mr. Powell will remain as a regular Fed director for a few months to avoid the impression of a de facto plea bargain or a forced exit,” Guha said. “Mr. Warsh’s provocative comments about ‘systemic change’ at the Fed are also likely to increase the likelihood that Mr. Powell will stay on for a period of time to protect the Fed and its staff.”

A Fed spokeswoman declined to comment on Mr. Powell’s plans.

If Mr. Powell were to resign now, it would give Mr. Trump room to appoint another director. Including Warsh, the president will appoint three people to the seven-member board, which includes first-term governors Christopher Waller and Michelle Bowman.

The Federal Open Market Committee requires a majority vote to change interest rates, but a majority of the board has limited influence over policy and personnel.

At the same time, investors could view rate cuts unfavorably if they see the committee as politically compromised.

But David Zervos, chief market strategist at Jefferies, said Friday that Wall Street would view Powell’s resignation positively. Mr. Zervos himself was interviewed for the position of Fed chairman, but did not make it to the final group.

“If Jay makes a statement that he is stepping down at the end of his term as chairman, it will actually drive the market higher and the interest rate market will become more positive, which means yields will fall and prices will rise,” Zervos said in an interview on CNBC. “That would have a more significant impact than having this case dismissed.”

Mr. Powell will have a chance to address the issue during his regular press conference Wednesday after the FOMC meeting.

Mr. Powell has so far remained mum about his intentions, but the market will be watching this issue closely as the Senate moves to confirm Mr. Warsh. The incoming chair has signaled a preference for lowering interest rates, as well as rethinking other aspects of the Fed’s operations.

“Kevin will bring a lot of strength to his work,” Zervos said. “He can change the way a lot of things work around the table.”