Justice Department drops Powell investigation

The U.S. Justice Department is dropping its criminal investigation of Federal Reserve Chair Jerome Powell, paving the way for the Senate to confirm Kevin Warsh, the president's nominee to head the central bank.

The decision marks a reversal for Jeanine Pirro, the U.S. attorney for the District of Columbia, who had vowed to continue the probe into cost overruns during the renovation of two Fed buildings, even after a judge had blocked the investigation.

Pirro said she would instead ask the Fed's inspector general to look into the cost overruns, which have risen from $1.9 billion to $2.5 billion in recent years. The central bank has attributed the higher costs to unexpected developments like excess lead, asbestos and inflation, which has raised the cost of building projects nationwide.

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"This morning the Inspector General for the Federal Reserve has been asked to scrutinize the building costs overruns," Pirro said in a post on X. "Accordingly, I have directed my office to close our investigation as the IG undertakes this inquiry."

The Fed's inspector general has reviewed the construction project twice. It found no wrongdoing.

Fight over central bank independence

Pirro's probe came after President Trump had repeatedly attacked the Fed and Powell for not raising interest rates more aggressively. Trump has blasted the renovations, verbally sparring with Powell during a visit to the site.

In March, a federal judge put the brakes on the DOJ, saying its criminal investigation was part of an improper campaign by the Trump administration to pressure the central bank into cutting rates. But Pirro had vowed to appeal that decision.

Her probe has drawn widespread criticism. Powell has called it a pretext for the White House's efforts to pressure the Fed into lowering interest rates, and a federal judge has agreed, criticized the investigation as an unjustified act of intimidation.

Earlier this year, Trump nominated former Fed governor Warsh to succeed Powell, whose term as Fed chair is due to expire next month. But Sen. Thom Tillis, R-N.C., had threatened to block the nomination unless the Justice Department dropped the investigation into the Fed.

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"If we put everybody in prison in federal government that had had a budget go over, we'd have to reserve an area roughly the size of Texas for a penal colony," Tillis said earlier this week, at a Senate Banking Committee confirmation hearing for Warsh.

Now Pirro's move appears to address Tillis' concerns, and pave the way for the Senate to confirm Warsh. But questions over Powell's future — and the overall shape of the Fed — remain.

Powell has not said whether he will step down from the Fed's board, which is the group that collectively decides on interest rates. His term as board member runs until 2028.

Powell has said he would make that decision based on what he thinks is in the best interest of the institution and the people the Fed serves. He may disclose more next week, when the Fed meets.

If Powell does step down from the board when his term as chair ends, it would give Trump the chance to appoint another Fed governor who may be more willing to push for the aggressive interest rate cuts the president wants. 

However, if Powell does choose to remain on the Fed's board once his term as chair expires, he will still get a vote on interest rates.

All of this Fed succession drama comes at a pivotal time for the global economy. The war with Iran has led oil prices and inflation to spike not only in the U.S but also across the world. The Fed usually fights inflation by keeping rates higher — meaning that under normal circumstances, it would be less likely to undertake the rate cuts Trump has pushed for.