• U.S. Treasury Secretary Scott Bessent spoke with President Trump on Tuesday, expressing concerns that a criminal investigation into Fed Chair Jerome Powell could harm financial markets.
  • The probe, led by U.S. Attorney Jeanine Pirro without prior notice to Treasury or White House officials, has sparked market volatility, with a falling dollar and rising bond yields.
  • Trump may announce a new Fed chair pick as soon as next week, with candidates including Kevin Hassett and Kevin Warsh, amid fears of political interference in central bank independence.

In a high-stakes conversation on Tuesday, Treasury Secretary Scott Bessent warned President Trump that the unprecedented criminal investigation into Federal Reserve Chair Jerome Powell is creating a "mess" with potential to roil financial markets, according to people familiar with the matter. This followed Bessent's prior call to Trump on Sunday, where he highlighted the risks from the probe launched by U.S. Attorney Jeanine Pirro, which centers on alleged misrepresentation of Fed headquarters renovation costs.

Powell denied any misconduct in a Sunday video statement, accusing the Trump administration of misusing the Justice Department for not cutting interest rates as desired. Markets reacted sharply on Monday, with the dollar dipping, bond yields climbing, and gold prices rising as investors grappled with fears of political meddling in monetary policy. Trump has publicly criticized Powell but distanced himself from the investigation, while Senator Thom Tillis vowed to block any replacement for Powell, questioning the DOJ's credibility.

Efforts to restructure the Fed leadership have hit a snag, with Bessent indicating in a January 21 Davos interview that Trump could announce a Fed chair pick "as soon as next week." Candidates under consideration include Kevin Hassett, Kevin Warsh, Rick Rieder, and Christopher Waller, sources say. Without a smooth transition, the ongoing probe—which Trump learned of only after subpoenas were issued—could complicate Powell's term end in May 2026 and undermine market stability.

Bessent did not oppose the investigation itself but stressed its risks in his talks with Trump, with Treasury denying any rift between them. This unfolds against broader administration priorities, such as capping credit card rates at 10% for one year to aid home savings and lowering mortgage rates for housing affordability. Banking leaders have responded cautiously to these proposals, highlighting tensions between consumer relief and industry profitability.

In Davos last week, Trump reiterated his push for Congress to enact rate caps and advance crypto market structure legislation, while Bessent emphasized deregulation efforts to ease bank debt rules and anti-money laundering guidelines. These moves align with a shift toward growth-focused policies, as seen in recent FSOC adjustments. The probe's origins trace to apparent signals to Pirro, possibly during a recent Trump meeting, though DOJ claims independence.

Stakeholders face mounting uncertainty: consumers could benefit from proposed credit card caps, but markets signal deep investor anxiety over Fed politicization. Powell's defiance has ignited debate on central bank independence, with Tillis mocking Powell's building oversight in public comments. Parallel probes pushed by figures like Housing Director Bill Pulte underscore internal administration dynamics, adding to the volatility.

Short-term, Trump's expected Fed chair announcement may proceed, but probe continuation could prolong market jitters. Long-term, successor selection amid inquiry risks credibility issues, while deregulation and rate caps might boost lending and affordability if enacted. Experts note Bessent's unusually hands-on role enhances reform odds, but without a deal, the situation threatens to escalate financial instability.

Correction: An earlier version misstated the timing of Bessent's Davos comments; they occurred on January 21, not last week.