Barclays Warning: Fed-DOJ Standoff Raises Succession Risk

Investing.com - As the legal standoff with the Department of Justice (DOJ) deepens, the Federal Reserve is facing a serious institutional crisis that could disrupt Chair Jerome Powell’s leadership transition.

Upgrade to InvestingPro for more insights - Enjoy up to 50% off now

On Friday, a federal court in Washington, D.C., dismissed the DOJ’s subpoena seeking records related to construction cost overruns and Powell’s congressional testimony. Judge James Boasberg ruled that the subpoenas were issued for “improper purposes,” specifically to force Powell to resign or lower interest rates.

Leadership succession becomes a focal point

This conflict occurs at a critical moment for the central bank, as Powell’s term as chair expires on May 15. Although the government seeks to confirm Kevin Waugh as his successor, the window of time is rapidly closing.

Powell has stated he has “no intention” of leaving the board before the DOJ investigation concludes, which involves potential serious crimes related to fraud and false statements that must be addressed transparently.

If a successor is not confirmed before the May deadline, Powell has indicated he will serve as “acting chair” as permitted by law. However, Barclays analysts believe this could be challenged by the White House, potentially sparking a contest over Fed leadership.

This situation could create “legal and institutional uncertainty” and may trigger new market volatility as investors weigh the implications of weakened congressional accountability of the Fed.

Geopolitical and policy tensions

The lack of traditional cooperation between the White House and the current chair has made the standoff more complex. Unlike historical precedents in 1978 or 1996, when the government supported the acting status of the incumbent chair, the current administration has actively criticized the DOJ’s protection of the Fed.

Recently, Powell declined an invitation to testify before the Senate Banking Committee, further escalating tensions and failing to fulfill the statutory requirement for semiannual monetary policy reports.

The high legal threshold for removal remains, but any attempt to oust Powell from the board could depend on a pending Supreme Court ruling regarding the dismissal of Board Member Lisa Cook.

Investors are weighing whether the “standoff” between the Fed and the DOJ remains a primary tail risk to interest rate stability before mid-2026.

This article was translated with AI assistance. For more information, see our Terms of Use.