Trump's War on the Federal Reserve Escalates With a Criminal Subpoena

This podcast is brought to you by ReliaQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. RelyQuest fortifies your business with agentic defense, AI that detects, contains, and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. RelyaQuest. Agentic Defense for the Enterprise. Learn more at ReliQuest.com. That's R-E-L-I-A-Q-U-E-S-T.com. From the opinion pages of the Wall Street Journal, this is Potomac Watch. The Trump administration sends a criminal subpoena to Federal Reserve Chairman Jerome Powell, who says he will not back down from these threats. What in the name of monetary policy is going on here? Plus, Iran's regime turns its guns against protesters as it tries to remain in power. while President Trump says the U.S. might have to intervene on behalf of the protesters. How would that take place? Welcome to Potomac Watch the Daily podcast of Wall Street Journal Opinion, and I'm Paul as you go, and now I'm here today with Joe Sternberg and Elliott... Kaufman. Joe, let's start with the shocker late Sunday about the criminal subpoena from the Justice Department to Jerome Powell. Let's listen to Chairman Jerome Powell in a highly unusual video respond to the subpoena. 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. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions or whether instead monetary policy will be directed by political pressure or intimidation. I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment. Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do. with integrity and a commitment to serving the American people. Well, Joe, that really was unusual from the Fed chairman. And really fighting back in a very public way, he is scheduled to end his chairmanship in May, but he could still stay on at the Fed through 2028 because his governor seat.

continues until then. We want to get into what this means for that decision going forward. But he's clearly pinning the defense on the Fed's independence. Is that the right argument to make? Is that what's at stake here? Yeah, Paul, I think it is the right argument and I think it is what's at stake here. I mean, this whole situation is completely bonkers. I mean, in terms of the... Subpoena itself, this all goes back to the stupid kerfuffle that we had last summer, where the Trump administration started tussling with the Fed about cost overruns at an office renovation. project that the Fed has been managing. And related to that, Chairman Jerome Powell went to Capitol Hill, and he testified before Congress in June, I think it was, about what was going on with that project. And then the whole thing seemed to fizzle. It was as if President Trump lost interest in that. It seemed that the administration had concluded that this was not going to be an effective political weapon that they could use to dragoon Chairman Jerome Powell into cutting interest rates. And he has reduced interest rates three more times over the past few months anyway. You even had that news photograph of President Trump and Chairman Jerome Powell in hard hats at the building site. But now you've got what seems to be... a fishing expedition looking for some evidence of perjury or some deceptive statements that Jerome Powell might have made to Congress as a result of all of this. And Jerome Powell is completely correct that the real thing that's going on here is that President Trump continues to be annoyed that the Fed has not cut interest rates more aggressively over the past year. Jerome Powell's other sin in Trump's eyes is that the Fed has warned that the... President's beloved tariffs could have some inflationary consequences that the Fed is monitoring. So that has sort of launched this effort by the administration to dislodge him. You know, there's some question about whether Trump himself knew that this subpoena was coming. But clearly, people within the administration seem to think that this is a way to curry favor with the boss. Let's talk about what the subpoena actually... seeks. And my sources say that it doesn't cite any particular potential lawbreaking. It seeks information, more information about Jerome Powell's testimony about the renovation project before Congress. And that's the implication of false statements before Congress. Now, that's a very dubious proposition. His initial responses to the Senate on this were pretty terse, but he said, look, we'll follow up in detailed responses, which they did. The idea that you can trip him up for false statements strikes me as far-fetched. The other thing the subpoena does is it asks for a lot more information about the renovation itself. Clearly, as you say, it sounds like a fishing expedition designed to see if they can find something related to potential wrongdoing as part of the construction. The project itself is 30% over budget, I am told, this new building renovation. And hey, Joe, Washington, 30% over budget?

within the federal government, you know, sort of these willy-nilly legal proceedings against individual policymakers is an awful way to go about trying to reform it. All right. We are going to take a break. When we come back, we'll talk about what this criminal subpoena, how it will affect the ability of Donald Trump to get his own nominees on the Fed when we come back. This podcast is brought to you by ReliQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. RelyQuest fortifies your business with agentic defense, AI that detects, contains, and eliminate cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. RelyaQuest. Agentic Defense for the Enterprise. Learn more at ReliQuest.com. That's R-E-L-I-A-Q-U-E-S-T.com. Think all wealth managers are the same? Fisher Investments is clearly different. As a fiduciary, Fisher always does what's best for its clients. They don't sell commission-based investment products or make commissions on trades. Their fees are structured so they do better when clients do better. That might be why many of their clients come from other wealth managers. Visit fissureinvestments.com for more. Investing in securities involves the risk of loss.

Welcome back. I'm Paul as you go here, and I'm with Joe Sternberg and Elliot Kaufman on Potomac Watch. On the Trump point, I mean, it really is hard to believe that something as significant as this, that is a criminal subpoena against a sitting Fed chairman. would not have at least been floated past the White House, if not debated. You know, I have another source who says, look, Trump knew about this, competing storylines. We'll see. That'll play out over time to see what's really true. But in any event, this is not a president who, you know, says, oh, I have nothing to do with the Justice Department, hands off. No way. He tells them what to do. So the question is, you've got Bill Pulte, who basically is the most eager. to please man in this administration. I mean, if you want to trigger man, you know, I'll do it. Bill Pulte will do anything. You've got Piro, who is a longtime presidential supporter, not a dumb person at U.S. Attorney. And then you got Pam Bondi at AG. Attorney General must have known about this. Can't believe she didn't and must therefore have signed off on it. And, you know, she's known for not exactly standing up to the president. On your point. about whether or not the goal here was to compromise the independence of the Fed. It's going to achieve the opposite. It's going to make it harder. We all listened to the comment by Jerome Powell, which was, sorry, we're not going to bend here. And as an institution, the other governors are likely to back Jerome Powell. But the other problem, Joe, is political. The President of the United States is shortly going to nominate, has to nominate, a replacement for Jerome Powell as chairman of the Fed. Already in the wake of this criminal subpoena, Thom Tillis, the North Carolina Republican Senator on the banking committee said, sorry, not moving any Trump nominee until this is settled. You've gotten other people, Elizabeth Warren, who's not surprisingly going to speak critical of this, but she's on the banking committee. Trump's not going to get anybody through who he wants to. with this. That's for starters. Yeah, I completely agree with you, Paul, that I think that the end result of the situation is that Fed independence is going to be more or less intact. And Jerome Powell is not going to allow himself to get bullied out of that position a minute before his chairmanship term expires in May if it really comes to that. I think the relevant question for the Trump administration at this point is how much pain do you subject yourself to get back to that status quo ante? So I think the most painful scenario here is that they keep going with this legal gambit and definitely tried to ride it out. And that eventually sort of reaches a point where you really do risk spooking.

bond markets in particular. You know, already, as we are recording this today on Monday, gold prices seem to be drifting upward a bit as investors are worried. I think that the market otherwise seems to be fairly stable, especially yields on treasuries. And that may be because Trump has bought himself a little time by claiming publicly that he didn't know that this was happening. But I think that, you know, the longer that you start getting the impression that maybe he did intend for this to happen, the more you do have to worry that investors are going to start sending very strong negative signals. I think that the best outcome, the best path back to that status quo ante is for Trump to avail of the fact that he has said over the weekend that he didn't know about this. And that might... mean that he needs to fire a couple of the people who were involved in the decision-making here and say it was all a mistake and I never meant for it to happen. And either of these outcomes is going to be embarrassing in one form or another. It's a matter of how much other pain you subject yourself to. One other point regarding the Trump policy at the Fed. If your goal is to... get like the people who agree with you on policy at the Fed, this doesn't help that either, not merely for Jerome Powell's replacement at the Fed. But Jerome Powell, his tenure as chairman, expires in May, but not his tenure as a Fed governor. Most Fed chairman, when they are no longer chairman, leave the board. And I think it's my knowledge is that Jerome Powell had intended to do so. And that would create another opening for an appointment for Trump on the Fed board. But if this continues, Pau might just say, look, I have to stay and I have to stay to protect the Fed. And that would mean the new chairman, whoever it is, assuming he can get confirmed, is going to have not another ally, but we'll have Jerome Powell there. So this could backfire in so many ways. We are going to take another break and we come back. We'll... Turn to Iran and the bloody protests there and what Donald Trump and the U.S. might do to help the protesters when we come back. This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. Listen at Schwab.com slash Washington Wise. Don't forget, you can reach the latest episode of Potomac Watch anytime. Just ask your smart speaker, play the opinion Potomac Watch podcast. That is, play the opinion, Potomac Watch podcast. From the opinion pages of the Wall Street Journal, this is Potomac Watch.

Welcome back. I'm Poles You Go here on Potomac Watch with Elliot Kaufman. And we're going to talk about Iran and the bloody protests that are escalating and escalated over the weekend. What's the latest out of Iran that we know about? The latest out of Iran is a bloodbath. At the least, you have hundreds of Iranian protesters killed, and many observers think that number is in the thousands. You have Iranian security forces gunning down protesters in the streets, and they feel a sense of impunity because Internet phone lines have been cut off. for now more than four days. There's no way for the foreign press or the Iranian press or the protesters themselves to get these images out. Only with the greatest difficulty can they, because there have been some of Elon Musk's Starlink terminals smuggled into the country, but we're just seeing snippets, security forces, shooting at the protesters, bodies strewn about on hospital. floors. The BBC verified a video of 180 body bags laid out at a single morgue in Tehran as families of the protesters were just told, walk around, look at all 100 or so bodies, figure out which one is your loved one. It's shocking and horrific. So this is a reprise of previous... protest events in Iran in the sense of the bloodiness of the crackdown. But it's a turn from the initial response from a week or two weeks ago when the protest started. The regime took a much more conciliatory line. And that obviously didn't work. And what we have here is they've exploded. the protests. So the regime feels beleaguered and responds with violence. They've got multiple elements of control, right? They've got the besiegi, who are these paramilitary groups right around on motorcycles and are particularly brutal. We've got the Iranian revolutionary. Guard Corps as enforcers. I mean, they're the people who usually work overseas, but they're also domestic enforcers. And are we seeing elements of the Iranian military in the streets? They have spoken about joining in the response, but we haven't quite seen that yet. They haven't turned there, in part because the military is considered less ideologically reliable to do that kind of. extremely personally difficult, unconscionable work. It's true that Iran had started off taking a more conciliatory line, in part because the protests had come out of a class that is not the usual protest class. It wasn't students. It was merchants in the traditional Iranian markets who had economic grievances. But as I think has become clear,

not just to us, but to everyone in Iran, the source of these economic grievances is the Iranian regime itself. They have been able to point to no way out of a plummeting currency, sky-high inflation, electricity shortages, water shortages. They can't defend their own country, as they showed in June. And what can they offer? The people, well, their big thing was a $7 monthly subsidy for each Iranian citizen in exchange for reducing subsidies to importers. $7 a month is not going to change anything. And that's even as Iran in this past year sent a billion dollars to... Hezbollah, enough for more than a thousand dollar monthly salaries for every Lebanese terrorist fighter. So the Presby United States has been making soundings about how he might respond and intervene here. Let's listen to the president on the weekend talk about the protests and possible response. I think they just want peace. They want to have freedom. The protests are after freedom. Iran has not allowed freedom for a long time. And the protests, I don't think they're trying to please be. They're trying to get somebody to help them. They're under siege. And now it looks like they're being shot, which is a very bad thing. Elliot, the president, has spoken about red lines, that the regime, if they were crossed, he would have to intervene. Not specific about how he would do so, but he has said we would have to hit them and hit them very hard. The red lines, when he used that, phrase that was before these killings. Now clearly those red lines have been crossed. So it really, I think, asked the question, how is the president going to respond? And would it be actually helpful to do so? I guess it depends on what he does. But he said no boots on the ground. But bombing? Would that matter? He continues to speak. that way, as if he is talking about a serious military response. His very first comments, he talked about, we're locked and loaded. Later on, he said, we are going to hit them where it hurts. And he said, if they start shooting, we'll shoot two. If he means that, then you have a range of options from military strikes. on things such as Islamic Revolutionary Guard headquarters, the whole apparatus of repression, even things such as Iran's missile program, what's left of its nuclear program, perhaps its oil export terminal. You can think of many targets that could certainly convey his serious and help to paralyze the regime itself and its...

ability to continue mowing down protesters. I think what Iran wants now, the regime, is to stall, to buy time, to find a way to just get a few more nights of shooting at. the protesters, such that if Trump does something then, it could be too late. The movement could already be put down. And the stalling tactics include the request for negotiations. We're now willing to negotiate with the U.S. Trump said on Sunday that, well, they want to negotiate and we'll see where it's something, trying to get something in motion on that. But I might have to act before that given events. But the kinetic... Military strikes you just described are not without risk. I mean, you know, we'd have to take down their air defenses again. We don't have an aircraft carrier in the Gulf now. We do have a base there, Air Force base, so we could put assets on target. But it would be a real escalation with Iran. And Iran itself has said, if you attack us, we will attack American bases and Americans elsewhere. There are other ways Trump could help, though, right? Cyber attacks. He could use cyber to be able to cripples. some of the responses by the regime, because the regime presumably has ways to communicate, and we could maybe shut those down. We also could go after their oil exports in a much more aggressive, systematic fashion, sink a couple of ships. If they won't stop, capture them, board them. What else could they do? I think cyber is the main intermediate option, and all of the targets that I listed previously... could be hit in different ways using cyber attacks. The other one that I would point to is covert operations, including working with Israel, which showed in June that it has Iran thoroughly penetrated. And so you could look at the different nodes in the Iranian... regime, both its Islamic Revolutionary Guard Corps, leading the repression against protesters. That's the ideological vanguard. Exactly. The means of communication, but also the economic lifeblood, which is the oil and, in particular, oil exporting activities. And so kinetic action, upfront, cyber, non-kinetic action, covert operations, I think they would all be looking at the same set of targets. So you mentioned Israel. And in June, the U.S. and Israel combined to degrade the Iranian nuclear program. And before that, the Israelis had done a lot of work on the missile program. Intrigingly, the Israelis at that time dropped a bomb on that notorious prison for political prisoners. But the U.S. didn't follow up. And in fact, the reporting was Trump was not happy with that at the time. there was still some expectation in the White House at the time that maybe this attack would stun the regime into some kind of nuclear negotiations and far-reaching inspections. I think that hope now has vanished in these succeeding months. But I will say, I don't think getting Israel involved in any public way, a mutual attack, for example. And Israel has a lot of military assets in the region, but I don't think that's a good idea.

because that would play into the regime's argument that this is a really a war between Iran and Israel. And we don't want to help them make that argument, I don't think. Plus, you might be imperative then that the regime strikes back and then you've got a broader war. So what we want here, I think, Ellie, is we want the people of Iran to succeed in overturning that regime so they can have a legitimate and representative government again. And how to do that is not easy from the outside. Absolutely right. And you do see a lot of arguments being made. I saw Senator Mark Warner from... Virginia saying, you know, U.S. intervention, not Israel, but U.S. intervention could cause a rally around the flag effect and actually undermine the protesters. I think that's only true if there were really large civilians. Yes. And I tend not to credit this argument so much, because first of all, we heard it back in June. And instead of a rally around the flag effect, Before the year was out, we have these massive protests. But second of all, I would listen to the protesters themselves and some of their leaders who are begging for President Trump to make good on his word because they are going out there every night facing guns and bullets and have nothing really to protect themselves other than their own large numbers and that. President Trump's promise. And so they are waiting to see what President Trump will do. I would listen to them on what's in their own interests right now. The son of the former Shah of Iran, who was deposed by the Islamic Revolution in 1979, has had an interesting role here. Apparently, when he called for... protests last week, there was a big response on the ground in Iran and certainly surprised me because he sits in exile here. We don't know the extent to which he still has a following in Iran. And yet he does seem to have one of some kind. Of course, he doesn't have any guns either. And he doesn't want to come in and be a dictator himself. He says, I would like to be a source of national unity. And I'm happy to be a transition leader to some kind of a democratic government. But that's interesting that he still has that following. Yes. I was also skeptical because there are longstanding criticisms of him. Has he built up the necessary organization in Iran? Maybe he has. Maybe he hasn't. But demonstrations and certainly revolutions need leaders. Someone has to appoint a place and time to meet and rally. Someone has to represent not only the past, but a better future for the people. And the more that he can step into that role and offer something to the Iranian protesters in the streets, I think the better their...

prospects will be. All right, Elliot Kaufman, thank you. We'll leave it at that for today. Thank you to Joe Sternberg and Elliot, and of course, especially to all of our listeners. We are here every day on Potomac Watch. Access to affordable credit helps me pay my employees, but I don't really need it. Infliction is killing me. But who cares? Big retailers are making record profits. That's why we support the Durban Marshall credit card bill. See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need. While increasing megastore profits. They deserve it, don't they? Tell Congress, stop the Durban Marshall money grab for corporate megastores. Paid for by the Electronic Payments Coalition.