DOJ Drops Powell Probe, Clearing Way For Kevin Warsh To Lead Federal Reserve

• Sen. Thom Tillis had blocked a vote on Warsh until the DOJ investigation ended; Powell's term as Fed governor extends until February 2028, but he may indicate next week whether he will serve that full term or leave in May
• The investigation was seen as potentially threatening Fed independence and risked backfiring by delaying the transition Trump wanted from Powell to his nominee Warsh
• Markets expect limited impact from the leadership change, with Warsh viewed as more open to rate cuts than Powell; odds of a rate cut by year-end rose to 30% from 23% following the news

DOJ Drops Powell Probe, Clearing Path for Warsh Fed Nomination

Key Development:

The Department of Justice ended its investigation into Federal Reserve Chairman Jerome Powell on Friday, removing a major obstacle to Kevin Warsh's confirmation as the next Fed chair in May.

Background:

The DOJ probe examined Powell's congressional testimony regarding a Fed renovation project that significantly exceeded budget. President Trump had criticized Powell's oversight of the project, with some viewing the investigation as pressure to sidestep the current chair. However, the probe risked delaying the transition to Warsh, Trump's preferred nominee.

Political Implications:

Sen. Thom Tillis (R-N.C.) had blocked a vote on Warsh until the investigation concluded. Powell previously stated he would remain in his position until the probe ended and could potentially serve until his Fed governor term expires in February 2028. He may clarify his intentions at next week's Fed meeting regarding whether he'll step down in May or continue through his full term.

Market Impact:

Markets currently anticipate minimal disruption from the leadership transition, though Warsh is considered more dovish on interest rates than Powell. According to CME Group's FedWatch tool, market probability of a rate cut before year-end increased modestly to 30% from 23% on Thursday.

Policy Outlook:

The leadership change could signal a shift in monetary policy direction, with Warsh's more accommodative stance on rate cuts potentially influencing future Fed decisions. Traders and investors are monitoring the situation for any immediate policy implications as the May transition approaches.