‘freaked Out’ About The Bond Market: White House Reels From Powell Probe

Treasury Secretary Scott Bessent spent months laying the groundwork for a smooth transition at the Federal Reserve that wouldn’t rattle markets.

That plan is now in disarray.

The Justice Department’s criminal investigation into whether Fed Chair Jerome Powell misled Congress about renovations at the Fed headquarters — and allegations over who leaked the news — has the White House in damage-control mode. Officials are scrambling to reassure markets and create distance from an episode that aides say was never meant to unfold, according to five people familiar with the administration’s reaction who were granted anonymity to discuss it.

The inquiry, which blindsided many White House aides, is renewing fears over the future of the central bank’s independence and offering fresh fodder for concerned Senate Republicans, many of whom will be needed to confirm the next Fed chair. Powell, whose term as chair ends in May, fanned those flames Sunday night, releasing an unusually direct statement framing the investigation as an attempt to pressure the institution to lower borrowing costs.

"This feud between Powell and the White House is, obviously, not good for markets," said Stephen Moore, a former adviser to President Donald Trump who remains close to the White House.

While Moore blasted Powell's management of the central bank's renovation, he said, “now is not the time to be bringing a criminal investigation against the Fed chairman.”

Privately, some White House officials see the episode as radioactive, with aides and allies eager to distance themselves from a probe they believe could do more damage to the White House than to Powell. One of the five people familiar said some inside and close to the White House are “freaked out” that a further threat to the Fed chief’s job security could spook the bond market.

White House press secretary Karoline Leavitt told reporters Monday that Trump did not direct the Justice Department to investigate Powell.

Aside from the immediate political backlash, the investigation could backfire in the long term for the Trump administration, solidifying Powell’s resolve to stay on the Fed board even after his chairmanship ends. That would deny the president the opportunity to fill a seat with an ally as he seeks a majority on the central bank’s seven-member board. Bessent said last week that he anticipated the president announcing Powell’s replacement either before or after his trip to Davos, Switzerland, later this month.

And given the Fed’s role in keeping a lid on inflation, the decision to target Powell in a criminal probe risks eroding Wall Street’s confidence in Trump’s economic agenda and the central bank’s credibility at a time when the president faces serious political challenges over his handling of the economy before the midterm elections.

“The American economy was poised for a breakout moment with tax cuts kicking in. Rather than headlines about that, they’re talking about the drama surrounding the Fed,” said a second person. “This kind of freelancing undermines what the administration is trying to do.”

That person and a third person familiar with the administration’s reaction said the Powell news caught many White House aides off guard.

The episode has some officials and allies again calling for the ouster of Federal Housing Finance Agency Director Bill Pulte. They suspect Pulte is behind the latest inquiry and many blame him for some of the administration’s most outlandish economic policy messaging, including Trump’s social media post proposing a 50-year mortgage, which led to a swift backlash. Bessent also once threatened to punch Pulte in the face at an event attended by dozens of people.

“The president has already had his doubts about Pulte, and if this doesn’t push him over the edge, I don’t know what will,” the first person familiar with the matter said. “Trump needs to save himself and the country from Bill Pulte.”

White House Communications Director Steve Cheung called Pulte “one of the President's most loyal and important advisors” and said he is doing a “great job” leading the FHFA, which oversees the mortgage-financing giants, Fannie Mae and Freddie Mac.

“Efforts by the Fake News to sow division inside of President Trump's all-star administration will not work and are a pathetic attempt to distract away from all of the victories being delivered for the American people,” Cheung said. “Bill Pulte is a patriot and has the full confidence of President Trump."

Pulte, who spent months last year lambasting Powell on social media and on television, recently pitched Trump on ousting Powell, going so far as to bring “wanted” posters of the Fed chief along with him, according to three of the people familiar.

A fourth person familiar said the White House is unhappy that the story about Pulte being the instigator got out and blame him for the leak.

“It undercuts the president’s comments that he knew nothing about the DOJ plans,” the person said, referring to the president’s Sunday night comments to reporters on board Air Force One.

Pulte denied any involvement.

“I don’t know anything about it,” he told POLITICO in a text message. “It’s outside my purview. That’s the DOJ’s area.”

Two of the people familiar said they believe Pulte’s job is safe for now, both because of the relatively muted market reaction and because the White House has been generally resistant to personnel changes.

The third person added that Pulte’s close relationship with both Trump, who he plays golf with, as well as Donald Trump Jr., gives him staying power in the administration and that while he may get a talking-to, his job is likely not in jeopardy.

So far, traders have largely looked past the risk of the administration attempting to oust Powell. While markets opened Monday in the red — with the dollar having fallen overnight — major stock market indexes were close to flat by midday, with yields on long-term government debt securities slightly up.

“I would expect that the markets would be happy to see that there’s more transparency at the Fed. This is something that people have been calling for for quite a long time,” White House National Economic Council Director Kevin Hassett, who’s also a frontrunner to be Trump’s pick to lead the Fed, told reporters Monday morning.

Victoria Guida contributed to this report.