Is the subpoena from the Department of Justice counterproductive? The dilemma of Powell's future may drag the Federal Reserve into the "shadow chairman" era

The latest legal offensive launched by the Trump administration against the Federal Reserve may be facing the risk of backfiring. This move not only failed to push back current Fed Chairman Jerome Powell but also intensified speculation about his continued tenure as a Fed governor after his term as chairman ends in May 2026.

Last week, the U.S. Department of Justice issued a grand jury subpoena to the Federal Reserve, an action seen as an escalation of Trump's attempt to interfere with monetary policy. However, this move has instead reinforced an expectation among Fed watchers: even if Powell himself has no intention of clinging on, he may choose to stay on to defend the institution's independence. If this occurs, a significant "counterbalancing" force could emerge within the Fed alongside the new chairman.

Former Cleveland Fed President Loretta Mester warned that this power structure could evolve into a "two popes" situation. In such an environment, financial markets and the public may be confused about who holds the authority and the direction of interest rates. Although Powell's allies state he has no intention of acting as a "shadow chairman," his deep qualifications and record of defending the institution will inevitably lead outsiders to view him as another authoritative voice.

Currently, Fed officials have signaled that they may keep interest rates unchanged until more inflation and employment data is available. Although this incident has not yet had a direct impact on short-term monetary policy, the political and legal turmoil it has caused threatens Trump's succession plans. Key Republican member of the Senate Banking Committee, Thom Tillis, has explicitly stated he will oppose any of Trump's nominees until this dispute is resolved, further exacerbating uncertainty about the Fed's future leadership.

The "Two Popes" Dilemma and Market Concerns

If Powell continues to serve as a governor after stepping down as chairman, an extremely unusual power dynamic may emerge within the Fed. Former Cleveland Fed President Loretta Mester described it as a "two popes" situation, where financial markets and the public may be confused about "who is in charge."

Antulio Bomfim, global macro head at Northern Trust Asset Management and a former advisor to Powell, pointed out that although Powell himself does not desire to be a "shadow chairman," his reputation, experience, and record of defending the institution as a former chairman will inevitably lead him to be seen as another authoritative voice within the Fed. Even if Powell does not subjectively seek confrontation, the objective "dual center" effect will leave investors at a loss when interpreting monetary policy signals.

This situation will not only make it difficult for the new chairman nominated by Trump to establish authority but may also lead to increased market volatility. Investors are accustomed to seeking policy guidance from the Fed chairman's statements, and in a committee with a "shadow chairman," the consistency of policy communication will face severe challenges.

The Subpoena Controversy and Powell's Strong Response

For a long time, Powell has been tight-lipped about his future plans, with most Fed observers previously expecting him to leave the central bank in May next year. However, the Department of Justice's subpoena has changed this expectation. Reports indicate that the subpoena pertains to Powell's congressional testimony last June regarding the renovation project of the Fed's headquarters On January 11, Powell made a rare and vigorous rebuttal through written and video statements. He stated that this legal action should be viewed as part of the "government threats and ongoing pressure." Powell bluntly said, "The threat of criminal charges is because the Federal Reserve sets interest rates based on our best assessment of serving the public, rather than following the president's preferences."

It is this tough response that has sparked widespread speculation that Powell may choose to stay on to counter administrative interference. Although his term as chairman will end in May 2026, his term as a Federal Reserve governor will last until January 2028.

Political Maneuvering and Succession Challenges

The Trump administration's radical strategy has also created political obstacles for the succession plan of the Federal Reserve chairman. Key Republican senator Thom Tillis of the Senate Banking Committee has vowed to oppose any Federal Reserve nominee from Trump until this legal issue is resolved. This means the confirmation process for a new chairman could become stalled.

Trump previously stated that he had selected Powell's successor but has not announced a specific candidate. National Economic Council Director Kevin Hassett and former Federal Reserve governor Kevin Warsh are seen as leading candidates. Steven Kamin, a senior fellow at the American Enterprise Institute, pointed out that while the Federal Open Market Committee (FOMC) typically seeks to work with a new chairman, if the new chairman is sufficiently divisive, FOMC members may rally around Powell, forming some sort of alliance.

According to media reports citing informed sources, there are growing concerns within the Trump administration and among allies that the escalation of this conflict could anger many current governors and regional Federal Reserve presidents, thereby increasing the difficulty for the new chairman to implement policies.

Power Struggle and Potential "Nuclear Option"

If Powell chooses to remain a governor, the most immediate impact would be to delay Trump's appointment of another governor, thereby hindering his plan to gain a majority on the Federal Reserve Board. Trump has long sought to control a majority on the board to exercise greater power over personnel, regulation, and institutional management, including potentially voting to remove regional Federal Reserve presidents who are not appointed by the president.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, analyzed that if the FOMC is unwilling to cooperate with a chairman appointed by Trump, and regional Federal Reserve presidents become an obstacle, Trump may pressure the board to dismiss one or more presidents.

Additionally, an upcoming Supreme Court hearing could become a variable. The Supreme Court is scheduled to hear a case on January 21 regarding the dismissal of Federal Reserve governor Lisa Cook (involving mortgage fraud allegations). If Trump wins on the issue of dismissing Lisa Cook, it would open the door to dismissing any Federal Reserve governor, including Powell, fundamentally changing the power dynamics of the Federal Reserve.

In terms of monetary policy, despite the escalating political storm, the Federal Reserve's decision-making has not yet been directly disrupted. Policymakers lowered the benchmark interest rate for the third consecutive month last month and indicated that they may keep rates unchanged this month to await more data on inflation and employment However, as the issue of Powell's future continues to develop, the future policy path is becoming increasingly unclear