Is the foundation of the US dollar faltering? The Powell-Cook case is intertwined, extending the battle to the Supreme Court.
2026-01-14 10:03:24
The political battle over the Federal Reserve's independence and the White House has entered a critical phase. The Justice Department's investigation into Chairman Powell and the Supreme Court's upcoming hearing on the removal of a governor are intertwined, potentially leading to a prolonged constitutional impasse. Markets are concerned that the cornerstone of US monetary policy is being shaken and are cautiously assessing the profound impact of this unprecedented crisis on interest rate paths and asset prices. On Wednesday (January 14th) during Asian trading hours, the US dollar index fluctuated narrowly around 99.23.
As the U.S. Department of Justice's investigation into the Federal Reserve continues, the battle for the Fed's political independence will extend to the Supreme Court.
On January 21, the Supreme Court will hear arguments in President Trump's attempt to remove Federal Reserve Governor Lisa Cook from her post. Last year, government officials accused Cook of fraud by misrepresenting her primary residence in mortgage applications, and Trump previously attempted to remove her but was blocked by the courts. A White House victory could set an important precedent for the president's current attempt to remove Federal Reserve Chairman Jerome Powell.
In a report, Bank of America economist Adiya Buff noted, "If the Supreme Court rules against Cook, it will significantly increase the likelihood of Powell being removed from office due to the Justice Department's investigation. We have always believed that the Cook case is more critical to policy direction than the selection of the next chairman, and the current situation particularly confirms this view."
The Federal Reserve saga escalated again after Powell announced last Sunday that he had received a subpoena from the Justice Department over a controversial multi-million dollar renovation project at the Fed headquarters. The investigation is reportedly focused on whether Powell made false statements about the project during his congressional testimony last year.
Trump has been a vocal critic of Powell and considered removing him from office last year. Powell insists that Trump has no power to remove him, but the situation could change if the president can establish grounds for removal.
On the surface, the move to remove Powell may seem to have limited significance: his term as chairman ends in May, at which point Trump is free to nominate a new chairman. However, Powell's term as a Federal Reserve governor will continue until 2028, meaning he could remain on the board and hinder Trump's demands for "substantial" interest rate cuts—as Trump emphasized in his social media post on Tuesday.
On the other hand, this could further incentivize Powell to complete his term as a governor, serving as a bulwark against Trump's attempts to undermine the Fed's independence. Powell has mostly declined to comment on Trump's sometimes sharp personal attacks. While previous presidents have attempted to coerce the Fed into easing policy, Trump's level of openness and aggressive stance is unique. More importantly, this marks the first time the Justice Department has launched an investigation to hold a sitting Fed chairman accountable.
Several analysts pointed out that the current situation may evolve into a protracted battle, and Powell may decide to remain on the board.
Deutsche Bank compared Powell to former Federal Reserve Chair Marina Eccles—the Federal Reserve building is now named after her. After being removed from her post by President Truman in 1948, Eccles chose to remain on the Federal Reserve Board of Governors until 1951, during which time she consistently championed the Fed's independence.
More notably, within the Federal Open Market Committee (FOMC), which sets interest rates, there may even be resistance to Powell remaining as chairman, even though Trump could nominate someone else to serve as Fed chairman.
In a client report, Matthew Luzetti, chief U.S. economist at Deutsche Bank, noted: "While this has never been the baseline scenario and previously seemed less likely, the events of last weekend likely increased the likelihood that Powell would choose to remain at the Federal Reserve. In fact, if the government insists on criminal charges against Chairman Powell and Senate Republicans are adamant about not proceeding with the nomination process for the Federal Reserve Board of Governors, the Federal Open Market Committee is likely to choose to keep Powell as chairman."
This brings the focus back to the hearings in the Cook case.
If Trump wins the case, he may use it as grounds to dismiss Powell. If Cook wins, it would mean a protracted tug-of-war between the Federal Reserve and the White House, significantly impacting policy direction.
Markets are closely watching for clues from the Federal Reserve's actions. Traders are generally betting that the policy meeting later this month will not result in any action. CME Group data shows that the market expects the next rate cut to be delayed until June.
Kevin Gordon, head of macro research and strategy at Charles Schwab, noted: "The Cook case verdict will have a significant impact on any president's ability to shape the Fed's structure. But it must be clear that while the market reactions to Powell-related news have been limited, the directional movements (dollar consolidation, stock market decline, bond market decline) have clearly shown how the market will digest the impact if such shocks persist for a long time."
(US Dollar Index Daily Chart, Source: FX678)
At 10:03 Beijing time, the US dollar index is currently at 99.22.
Cook's hearing becomes a crucial preliminary battle
As the U.S. Department of Justice's investigation into the Federal Reserve continues, the battle for the Fed's political independence will extend to the Supreme Court.
On January 21, the Supreme Court will hear arguments in President Trump's attempt to remove Federal Reserve Governor Lisa Cook from her post. Last year, government officials accused Cook of fraud by misrepresenting her primary residence in mortgage applications, and Trump previously attempted to remove her but was blocked by the courts. A White House victory could set an important precedent for the president's current attempt to remove Federal Reserve Chairman Jerome Powell.
In a report, Bank of America economist Adiya Buff noted, "If the Supreme Court rules against Cook, it will significantly increase the likelihood of Powell being removed from office due to the Justice Department's investigation. We have always believed that the Cook case is more critical to policy direction than the selection of the next chairman, and the current situation particularly confirms this view."
The Federal Reserve saga escalated again after Powell announced last Sunday that he had received a subpoena from the Justice Department over a controversial multi-million dollar renovation project at the Fed headquarters. The investigation is reportedly focused on whether Powell made false statements about the project during his congressional testimony last year.
Powell's dual-term predicament
Trump has been a vocal critic of Powell and considered removing him from office last year. Powell insists that Trump has no power to remove him, but the situation could change if the president can establish grounds for removal.
On the surface, the move to remove Powell may seem to have limited significance: his term as chairman ends in May, at which point Trump is free to nominate a new chairman. However, Powell's term as a Federal Reserve governor will continue until 2028, meaning he could remain on the board and hinder Trump's demands for "substantial" interest rate cuts—as Trump emphasized in his social media post on Tuesday.
On the other hand, this could further incentivize Powell to complete his term as a governor, serving as a bulwark against Trump's attempts to undermine the Fed's independence. Powell has mostly declined to comment on Trump's sometimes sharp personal attacks. While previous presidents have attempted to coerce the Fed into easing policy, Trump's level of openness and aggressive stance is unique. More importantly, this marks the first time the Justice Department has launched an investigation to hold a sitting Fed chairman accountable.
Long-term consequences
Several analysts pointed out that the current situation may evolve into a protracted battle, and Powell may decide to remain on the board.
Deutsche Bank compared Powell to former Federal Reserve Chair Marina Eccles—the Federal Reserve building is now named after her. After being removed from her post by President Truman in 1948, Eccles chose to remain on the Federal Reserve Board of Governors until 1951, during which time she consistently championed the Fed's independence.
More notably, within the Federal Open Market Committee (FOMC), which sets interest rates, there may even be resistance to Powell remaining as chairman, even though Trump could nominate someone else to serve as Fed chairman.
In a client report, Matthew Luzetti, chief U.S. economist at Deutsche Bank, noted: "While this has never been the baseline scenario and previously seemed less likely, the events of last weekend likely increased the likelihood that Powell would choose to remain at the Federal Reserve. In fact, if the government insists on criminal charges against Chairman Powell and Senate Republicans are adamant about not proceeding with the nomination process for the Federal Reserve Board of Governors, the Federal Open Market Committee is likely to choose to keep Powell as chairman."
This brings the focus back to the hearings in the Cook case.
If Trump wins the case, he may use it as grounds to dismiss Powell. If Cook wins, it would mean a protracted tug-of-war between the Federal Reserve and the White House, significantly impacting policy direction.
Markets are closely watching for clues from the Federal Reserve's actions. Traders are generally betting that the policy meeting later this month will not result in any action. CME Group data shows that the market expects the next rate cut to be delayed until June.
Kevin Gordon, head of macro research and strategy at Charles Schwab, noted: "The Cook case verdict will have a significant impact on any president's ability to shape the Fed's structure. But it must be clear that while the market reactions to Powell-related news have been limited, the directional movements (dollar consolidation, stock market decline, bond market decline) have clearly shown how the market will digest the impact if such shocks persist for a long time."
(US Dollar Index Daily Chart, Source: FX678)
At 10:03 Beijing time, the US dollar index is currently at 99.22.
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