Trump's push to politicize the Fed could cause further market "volatility"

The Justice Department is investigating Federal Reserve Chair Jerome Powell allegedly over his testimony to Congress about building renovations. Powell offered a forceful video response on Sunday, after revealing the Fed had been subpoenaed.

“I have deep respect for the rule of law and for accountability in our democracy. No one, certainly not the chair of the Federal Reserve, is above the law,” Powell said. “But this unprecedented action should be seen in the broader context of the [Trump] administration's threats and ongoing pressure.”

“Marketplace Morning Report” host Sabri Ben-Achour discussed the news with Julia Coronado, founder and president of Macro Policy Perspectives and a professor at the University of Texas at Austin’s McCombs School of Business. The following is an edited transcript of their conversation.

Sabri Ben-Achour: So what is that “broader context”? What is this ultimately about?

Julia Coronado: Well, he went on to say that this is about whether the Fed will be able to continue to set interest rates based on evidence and the economy, or whether, instead, monetary policy will be directed by political pressure and intimidation. An extraordinary statement coming from the chair of the Federal Reserve.

Ben-Achour: What did you think when you saw this headline?

Coronado: I was glad to see the statement from Chair Powell immediately after I saw the first headline. I think it's appropriate at this stage for the Federal Reserve to acknowledge that a sequence of events, including the attempted firing of [Fed] Governor Lisa Cook and previous attempts to pressure Chair Powell to leave, are politically motivated. They're about the President wanting interest rates to be lower to stimulate the economy, and the Fed has not been willing to do more than a few rate cuts because inflation is high, and that is a source of frustration for the President.

Ben-Achour: Markets moved down on this news, Treasury yields went up slightly. At what point does this battle over Fed independence translate into a real financial market reaction?

Coronado: Well, it depends on on where we go from here. We did already hear from Republican Senator [Thom] Tillis, who's on the Senate Banking Committee, that he was not pleased with this and would hold up any Fed nominations — including Chair Powell's replacement — if this lawsuit goes forward. And we will need to see some indication that there is a line in the sand when it comes to the independence of the Fed. Otherwise, you know, we could see further market reaction and volatility.