Jan 12 (Reuters) – The Trump administration has ramped up its pressure campaign on the U.S. central bank, threatening to indict Federal Reserve Chair Jerome Powell over comments he made to Congress about a building renovation project, prompting the Fed chief to call the move a “pretext” to gain more influence over the setting of interest rates.

The latest development in a long-running effort by U.S. President Donald Trump to push the Fed to dramatically lower rates had immediate fallout in Washington and on global markets.

U.S. Republican Senator Thom Tillis, a member of the Senate Banking Committee that vets presidential nominees for the Fed, said the threatened indictment puts the U.S. Justice Department’s “independence and credibility” in question. Tillis, who is not running for reelection this year, said he would oppose any Trump nominees to the Fed, including whoever is named to succeed Powell as central bank chief, “until this legal matter is fully resolved.”

Rates on longer-term U.S. Treasury bonds rose as investors parsed what a less independent Fed could mean for inflation and monetary policy, the sort of reaction that could, if amplified, constrain Trump’s efforts to reshape the Fed, considered the most influential central bank in the world and a cornerstone of the world financial system.

Trump’s efforts to address broad concerns about “affordability,” particularly when it comes to financing home mortgages, could be upended if long-term borrowing costs rise, as they may if investors come to view the Fed as no longer setting monetary policy with a view to controlling inflation.

Gold hit a record high and the dollar fell. Major U.S. stock indexes opened lower, with bank stocks under pressure over a Trump proposal to cap interest rates on credit cards.

“Obviously there are more concerns that Fed independence is going to be under the gun, with the latest news on the criminal investigation into Chair Powell really having reinforced those concerns,” Jan Hatzius, chief economist at Goldman Sachs, said at the investment bank’s annual global strategy conference in London.

At stake is the independence of the Fed to set U.S. monetary policy without undue influence by elected officials like Trump who would prefer cheaper borrowing costs for political reasons – at the possible expense of long-run inflation control that can require a central bank to slow the economy and take steps that raise the unemployment rate.

Powell – who was nominated by Trump to lead the Fed in late 2017 and confirmed by the Senate to the position in early 2018 – will complete his term as Fed chief in May, but he is not obligated to leave its Washington-based Board of Governors until 2028, and a number of analysts saw the latest move by the administration as adding to the chances that he will defiantly remain at the central bank.

The criminal indictment threat emerged about two weeks before Trump’s effort to fire another Fed official, Governor Lisa Cook, will be argued before the Supreme Court. The latest move was met with a guarded reaction on Wall Street.

Investors have been warily watching as the sparring match between the White House and the Fed has played out ever since Trump was elected to a second term in November 2024 on promises to improve affordability for Americans after a run of high inflation.

The investigation and Powell’s pointed response sharply escalate a row that risks upending the independence of the Fed, a bedrock of U.S. economic policy and a cornerstone of its financial system, investors said.

‘THREATS AND ONGOING PRESSURE’

Trump officials’ latest salvo was revealed late on Sunday by Powell, who said the Fed had received subpoenas from the U.S. Justice Department last week pertaining to remarks he made to Congress last summer over cost overruns for a $2.5 billion building renovation project at the Fed’s headquarters complex in Washington.

“On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June,” Powell said. “I have deep respect for the rule of law and for accountability in our democracy. No one – certainly not the chair of the Federal Reserve – is above the law.”

“But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure” for lower interest rates and more broadly for greater say over the Fed, he said.

“This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role … Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.”

Trump told NBC News Sunday that he had no knowledge of the Justice Department’s actions. “I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings,” Trump said.

A Justice Department spokesperson declined to comment on the case but added: “The Attorney General has instructed her U.S. Attorneys to prioritize investigating any abuse of taxpayer dollars.”

POWELL INQUIRY A ‘LOW POINT’ IN TRUMP PRESIDENCY

Trump has demanded the Fed cut rates sharply since returning to the White House in January, blaming the central bank for holding back the economy and musing about firing Powell despite the legal protections ostensibly covering the Fed chief from removal.

The independence of central banks, at least in setting rates in order to control inflation, is considered a central tenet of robust economic policy, insulating monetary policymakers from short-term political considerations and allowing them to focus on longer-term efforts to keep prices relatively stable.

The inquiry into Powell “is a low point in Trump’s presidency and a low point in the history of central banking in America,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania’s Wharton School.

“Congress did not design the Fed to reflect the president’s daily fluctuations, and because the Fed has rebuffed President Trump’s efforts to take the Fed down, he is launching the full weight of American criminal law against its chair.”

(Reporting by Howard Schneider, Ann Saphir and Michael Derby; Additional reporting by Saqib Ahmed in New York; Editing by Shri Navaratnam and Paul Simao)