The Cost of the Jay Powell Investigation

January 13, 2026

Following yesterday’s shock report the U.S. Justice Department has launched a criminal investigation of Federal Reserve Chair Jay Powell over renovations of the Fed’s headquarters, we see several important results that could be of concern to markets:

• The Trump administration has, to date, been quite effective ensuring few leaks.  That changed yesterday as news story after news story cited administration sources directly naming Federal Housing Finance Agency Director William Pulte as the primary instigator of the investigation and detailing meetings Pulte had with President Trump about it.  For the president, the leaked stories directly contradict his denials of having known anything about the effort to bring the case against Powell.  And in one case, it revealed how Treasury Secretary Scott Bessent urged Trump not to pursue the case as it would create a “mess” and be bad for financial markets.

  Pulte, who is broadly seen in Washington as highly volatile and hard to work with, was known to have a number of enemies within the Trump administration, but it is clear now that number is much larger than anyone knew (We note that Bessent is one of them following reports of Pulte trashing Bessent to Trump and encouraging him to fire Bessent – something that resulted in a physical altercation between Pulte and Bessent this past fall).  

• Importantly, Pulte’s involvement in the Powell investigation goes to the future of Freddie Mac and Fannie Mae. Pulte, as the overseer of the two giant mortgage entities, is effectively in charge of the privatization effort. Trump has said repeatedly over the last year that he wants to privatize them and is expected to again call for their privatization at the World Economic Forum in Davos next week.  But as we have learned from administration officials, Pulte’s focus on doing political hit jobs of perceived opponents of the president (recall Pulte is responsible for the criminal referral of Federal Reserve Board Governor Lisa Cook and several Democratic members of Congress for alleged mortgage fraud) masks the fact that he has actually done very little preparatory work – a likely mammoth task that will require significant Congressional and financial market engagement.  But the Powell investigation revelations has pushed Pulte’s already acidic relationship with congressional leaders to a new low. 

•  Finally, news of the investigation has created a serious new split between Congressional Republicans and Trump.  As the midterm elections come into focus, nervous Congressional Republicans are increasingly defying the president, having broken with Trump over the Epstein file release (a persistent and growing agitation point as the Justice Department continues to delay the release of the files despite legislation requiring their release by December 19th – less than 1 percent of the total remaining documents have been released), Trump telling House Republicans last week “You have to be a little flexible on [the] Hyde [Amendment]” in order to extend Obamacare subsidies – something appalled Republicans took as akin to Party heresy – and a number of other issues.

In short, the Powell investigation appears to have created a series of new dynamics in Washington for Trump, none of which are favorable, and represents another distraction to his agenda (Venezuela, defense spending, seeking limits on credit card rates, etc.), just as another government shutdown looms   The expectation is the Powell investigation will end up petering out or failing in court.  But the fallout is clearly much bigger.