Bank of America Warns Fed Probe Into Powell Adds New Risks to U.S. Monetary Policy

Bank of America has warned that the U.S. Justice Department’s criminal investigation into Federal Reserve Chair Jerome Powell’s congressional testimony related to building renovations introduces new and underappreciated risks for U.S. monetary policy, even as financial markets have so far shown little reaction. According to Bank of America, the muted market response should not be mistaken for a lack of longer-term implications for Federal Reserve independence and future policy decisions.

BofA U.S. economist Aditya Bhave noted that markets have largely “looked through the news,” pointing out that the 30-year U.S. Treasury yield has risen by only about 2 basis points following reports of the investigation. Historically, such concerns around the Fed’s independence would normally trigger a much sharper reaction in long-term yields. This restrained response contrasts sharply with market behavior last summer, when former President Donald Trump suggested he might remove Powell from office. At that time, the 30-year Treasury yield jumped 8 basis points on July 11 and rose another 11 basis points intraday on July 16 before eventually pulling back.

Bank of America believes Powell’s strong and public response to the recent speculation has reassured investors, increasing the perceived likelihood that he will remain on the Federal Reserve Board as a governor after his term as chair expires in May. The bank cited data from Polymarket showing that the probability of Powell leaving the board by the end of the year dropped sharply, from 83% to 57%, following his comments.

However, Bhave cautioned that the Justice Department investigation could have indirect policy consequences. He warned that it may embolden more hawkish members of the Federal Open Market Committee, potentially making it harder for a future, more dovish Fed chair to justify interest rate cuts on purely economic data. This dynamic could complicate the path of monetary easing even if inflation and growth data soften.

Bank of America also emphasized the importance of the Supreme Court’s upcoming January 21 hearing related to Federal Reserve Governor Lisa Cook. The bank argued that this legal decision could prove more consequential for the future direction of U.S. monetary policy than the identity of the next Fed chair. A ruling against Cook, BofA said, would significantly increase the probability that Powell himself could face removal, adding another layer of uncertainty to the Federal Reserve’s leadership and policy outlook.