Wall Street bank bombshell just shook up Fed's next move

The debate over when the Federal Reserve will finally start cutting rates just picked up a new and unnerving variable: a criminal investigation into the sitting Fed chair.

Federal prosecutors have opened a criminal inquiry into Jerome Powell over the roughly $2.5 billion renovation of the Federal Reserve’s Washington headquarters and whether he misled Congress about the project’s cost and scope, according to reports from BBC News and the New York Times.

Powell has described the probe as “unprecedented” and said the Justice Department issued grand jury subpoenas threatening him with criminal indictment tied to his testimony before the Senate Banking Committee, according to CNBC.

That legal drama would be market‑moving in any environment, but it is explosive when traders, homeowners, and small‑business owners are already laser‑focused on when rate relief finally arrives.

Bank of America drops major warning on DOJ's Powell investigation

The news went from headline risk to policy risk when one of Wall Street’s biggest banks framed it as a direct threat to the rate‑cut timetable.

A criminal investigation into Powell “could potentially delay planned interest rate cuts,” said Phemex, summarizing a new note from Bank of America.

The bank told clients that the probe “introduces new risks for U.S. monetary policy” and might “galvanize the hawks on the FOMC,” making it harder for the next Fed chair to argue for cuts that the committee views as purely data‑driven, according to Investing.com’s account of the research.

Markets have “essentially looked through the news” so far, with the 30‑year Treasury yield up only about 0.02 of a percentage point, said Bank of America’s U.S. economist Aditya Bhave in comments reported by Investing.com.

Bhave contrasted that muted move with last summer, when President Doland Trump’s suggestion that he might remove Powell triggered what the bank called “a very different story,” with long yields jumping by as much as 0.19 of a percentage point over a few sessions.

Bank of America believes Powell’s forceful response to recent speculation “appears to have increased the probability, in the eyes of investors, that he will stay on the Fed Board as a Governor” after his term as chair ends, said Investing.com. The outlet cited Polymarket data showing the odds of Powell leaving the board by year‑end falling from 83% to 57%.

Central bankers circle the wagons around Fed chair

While Bank of America is gaming out the market implications, central bankers around the world are worried about something more existential: whether an independent Fed can survive this kind of political and legal crossfire.

Central bank chiefs from major economies “stand in solidarity” with Powell and voiced concern about threats to the Fed’s independence after the investigation became public, reported BBC News.

Global officials see the criminal inquiry as landing after repeated demands from President Trump for deeper and faster rate cuts, raising fears that legal tools are being used as leverage over monetary policy, said The New York Times.

Related: J.P. Morgan: Cooling inflation sets Fed interest-rate cut bet

Powell said “the possibility of criminal charges is a result of the Federal Reserve establishing interest rates based on our best judgment of what benefits the public, rather than adhering to the President’s preferences,” according to CNBC’s account of his video statement.

He warned that the fight will determine whether the Fed can “continue to set interest rates based on factual evidence and current economic circumstances, or if monetary policy will be swayed by political coercion or intimidation.”

My perspective on Powell’s statement is that it's not the kind of language you'd expect from a Fed chair. It is the kind of language that makes investors rethink how much faith they can put in the old “don’t fight the Fed” rule.

When politics, courts, and Fed rate cuts collide

If you are trying to guess when your mortgage rate or credit card APR will finally come down, the messy interaction among law, politics, and Fed mechanics suddenly matters a lot.

Bank of America warned that the investigation “might also galvanize the hawks on the FOMC,” which could make it harder for a more dovish successor to push through cuts without appearing to cave to political demands, said Investing.com.

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The same note argued that the Supreme Court’s upcoming January 21 hearing related to Governor Lisa Cook is now “more important for the policy trajectory than the identity of the next Fed Chair,” because an adverse ruling could “significantly raise the probability” that Powell himself faces removal.

Options traders are already repositioning. A “growing camp” in the derivatives market is betting on no Fed cuts in 2026, reflecting concern that the central bank stays sidelined longer than previously thought, reported Bloomberg.

That kind of shift in expectations can filter quickly into banks’ funding decisions, corporate budgets, and the rates you see when you go to refinance. 

Powell probe may chill policymaking: Higher‑for‑longer meets legal‑for‑longer

What started as a rate‑path story is turning into a higher‑for‑longer and legal‑for‑longer story that reaches directly into household budgets.

If Bank of America is right and the Powell probe makes policymakers more cautious, I think you could see:

• Stubbornly high credit card and personal‑loan rates: High rates could last longer, as banks keep pricing to a higher policy path while the Fed waits for the dust to settle.
• Less relief on mortgages and home‑equity lines: The central bank may resist big moves while its leadership is in legal limbo, according to The New York Times.
• A choppier stock tape: Rate‑sensitive sectors such as tech, REITs, and high‑dividend utilities may swing on every headline about subpoenas, hearings, or Powell’s future.

Bank of America said markets so far have “looked through” the headlines, but the bank’s own analysis makes clear that the investigation “could affect economic forecasts and market stability” if it delays cuts, according to Phemex.

That is a polite way of saying your bond returns, your equity risk, and your borrowing strategies may all have to adapt to a Fed that is hemmed in by more than just inflation and jobs data.

When you plan big money moves over the next year, go beyond just watching CPI releases and jobs reports.

I recommend keeping an eye on court calendars, Justice Department decisions, and research notes, such as those from Bank of America, to figure out when the Fed will finally feel free to cut.

Related: Powell pushes back as DOJ probe raises fears for Fed independence