The Justice Department said it is ending its investigation into Federal Reserve Chair Jerome Powell, U.S. Attorney Jeanine Pirro said on Friday. The announcement removes a significant impediment to the Senate confirmation process for Kevin Warsh, President Donald Trump’s choice to head the Federal Reserve.
Lawmakers and markets had been watching the status of the inquiry closely because the criminal investigation had delayed Warsh’s confirmation hearings. Republican Senator Thom Tillis of North Carolina had vowed to block all Federal Reserve nominees until the Department of Justice ended what he described as a baseless investigation, creating a political roadblock that is now lifted.
Immediate market reaction
Following the news, the U.S. dollar fell and Treasury yields declined. Short-term Treasury trading suggested traders expect the change in the nomination outlook could lead to faster policy easing under Warsh, who has publicly stated he believes interest rates should be lower.
U.S. equities were mixed after the announcement and broadly followed their pre-existing intraday patterns. One notable exception was a sharp rally in chip stocks that helped push the Nasdaq more than 1% higher.
Voices from markets and fund managers
“Warsh is a little bit more dovish than Powell. At his hearing earlier this week, he emphasized trimmed and median measures of inflation, versus where Powell would often emphasize core, which is more just ex-food and energy. Trimmed and median are a little bit weaker than core, so the market’s reading this as Warsh is going to emphasize these weaker inflationary measures and it could lead to him trying to get through more cuts than Powell would have. So, right now the market’s reading this as a little bit dovish. The December Fed meeting is five basis points lower on the day so that’s causing the dollar to sell off a little bit.”
- Noah Buffam, Director, FICC Strategy, CIBC Capital Markets, Toronto
“The main thing was that this was a big impediment for the Federal Reserve hearings on having the new chairman. I think that would add a lot of certainty if we can move ahead on that. They did drop it, but they also said they were waiting for a report. But I have a feeling that this was a nice way for them to just drop it. It was politically unpopular. Members of Congress said they didn’t see a crime. I think it’s very positive for reducing one uncertainty.”
- Tom Plumb, Portfolio Manager, Plumb Balanced Fund, Madison, Wisconsin
"With the DOJ investigation closing, Warsh can now be considered the Chair-In-Waiting. He won’t be a sock puppet of the President, so a few months from now we could see some social media posts complaining about how Kevin isn’t cutting rates.
Warsh’s doctrine of ’less is more’ when it comes to communication from the Fed could mean that policy announcement days are going to have a lot more volatility than in the past. Markets will still hang on every word of FOMC voters, but if there are fewer words to hang on, that creates more opportunities for surprises. That could push market rates higher, embedding a jump-scare premium to reflect the risk that the Fed can do the unexpected."
- Brian Jacobsen, Chief Economist, Annex Wealth Management, Menomonee Falls, Wisconsin
Context and potential implications
Officials and market participants said the closure of the probe reduces a key political uncertainty around the leadership of the Fed. Observers noted the department indicated it was waiting for a report, but nonetheless decided to end the investigation. Market reactions reflected an expectation that Warsh may prioritize different inflation measures than Powell and that such emphasis could translate into a more accommodative policy path.
Traders priced in a modestly more dovish outlook for monetary policy, with short-term expectations shifting toward the possibility of earlier or larger rate cuts under Warsh compared with a continuation of Powell’s approach. The dollar weakened and short-term Treasury yields moved lower on that change in expectations, while equity investors responded unevenly, with technology chips staging a notable advance.
What remains uncertain
- The precise timeline for Warsh’s confirmation in the Senate now that the legal impediment has been removed remains subject to the normal confirmation process.
- How Warsh would balance public communication and policy decisions was highlighted by commentators as a potential source of market volatility, given his stated preference for more limited communication on policy.