DOJ vs. Federal Reserve

Kevin W. Frisz
Jan 12
7 min read

Updated: Jan 16

January 12, 2026

Summary

“Hey Jay! How was your weekend? Watch any football? The Golden Globes?”

“No, I had to make a video explaining why I was being investigated by the Department of Justice. And how it’s a pretext for the President to bully the Fed to lower interest rates.”

“Oh… Well, the Bears Packers game was really exciting!”

I imagine that was Jay Powell’s chat with his coffee guy on his way to work today. As you’ve probably heard, the US Department of Justice issued a grand jury subpoena to the Federal Reserve, as part of a possible criminal indictment of the Chair of the Federal Reserve of the United States of America. (There’s a sentence you don’t see every day.) We’ll talk about that below.

Our other major topic today is also political. (Imagine that!) Late on Friday, President Trump repeated a call to cap interest rates on credit cards. This is not a new idea, but apparently the market is taking it more seriously this time. The large banks are trading down on the news. At the moment, the market is down only slightly. But interest rates are rising (as you might imagine). And gold is the big winner today (+2-3%).

DOJ attacks Jay Powell

You want to hear something funny? President Trump was the one who appointed Jerome (“Jay”) Powell as Fed Chair in 2017. Since then, the President has criticized Powell at every available moment for not setting interest rates how the President thinks they should be set.

To recap the feud: the President wants lower interest rates, but the Fed is ignoring him. Instead, the Fed is doing what it’s always done – trying to achieve its twin goals of maximizing employment and minimizing inflation through interest rate policy. That is the Fed’s job according to the law. The Fed’s job is not “make mortgages as cheap as possible” or “lower the interest on the national debt” or anything else.

This tension escalated dramatically over the weekend with a potential criminal indictment of the Fed Chair. The target here is Jay himself, not the Fed. The DOJ plans to claim that Jay lied to Congress in his June testimony about the renovation of the Federal Reserve buildings. With this bold action, the United States is joining an exclusive club of nations who have prosecuted the head of their central bank system. (It’s not typically the type of company you’d like to keep.)

In an interview last night, President Trump said he didn’t know anything about it. In the other corner, Chair Powell released a two-minute video explaining what was happening and that he believes the charges are a pretext to force the Fed to lower interest rates. Speaking in his normal measured tone, I believe Powell was attempting to calm markets before they opened. (But I imagine his defense lawyers were furious.)

As a reminder, the President does not have the power to fire a Federal Reserve governor. Fed officials can only be removed “for cause”. It seems the DOJ is doing their best to create a “cause”.

So… okay. This is happening. What’s the impact?

Long-term, it could be very bad. But short-term, probably not much. Interest rates are set by committee. Not by the Fed Chair. The Fed Chair is the most visible member of the Fed, but Jay’s vote counts just the same as the other 12 members of the committee. So even if Powell were fired and/or arrested today, there would still be 11 other sitting members setting policy.

However, after seeing what just happened to Jay, the other 11 members likely are going to be reluctant to stand up to the President in the long term. This obviously threatens the independence of the Fed. That’s bad. Potentially, very bad. You see, the whole point of the Fed is to make it “independent” from the whims of politicians whose foresight might only extend as far as the next election or polling data.

Interestingly, Tom Thillis, a Republican Senator on the Banking committee came out in defense of Powell. He said, “If there were any remaining doubt about whether advisers within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none. It is now the independence and credibility of the Department of Justice that are in question. I will oppose confirmation of any nominee for the Fed until this legal matter is fully resolved.”

In the House, the Republican Head of the House Financial Services Committee, French Hill, also defended Powell. Hill said that Powell is a man “of integrity” and that pursuing charges is “a distraction”. That’s one way to put it.

What’s the punchline for the market?

Remember in our 2026 outlook last week, we had a list of questions that I hoped would never be answered? Add this one to the list: “What if the Fed loses its independence?” Line it up next to our current batch of risks like “end of Nato” or “Russia attacks Europe”.

If the Fed loses independence, the market would assume that politicians will run the economy “hot”, resulting in inflation. And that inflation is no longer being contained by anyone. If you remember your econ 101 class, you know that rising inflation expectations mean that long-term interest rates will rise. Ironically, the 30-year mortgage rate would end up higher than before.

As an aside, JP Morgan research said this morning that they don’t expect any further rate cuts for the rest of this year. As we discussed on Friday, that’s not surprising given the relatively tame job report on Friday. But every month is a new set of data, so we’ll have to see.

Credit Card Rate Cap Proposal From White House

Late on Friday, President Trump said that he would limit credit card interest rates at 10%. The current rates vary but are above 20% for most cards. Now, he obviously cant just do that by executive decree. That would require a change to the law. But interestingly, the idea has fans on the far left side of the aisle as well. So the market seems to think this idea actually might happen. The bank stocks are trading down today.

What would be the impact? I’ll spare everyone a description of how the credit card business works. But here’s the punchline: most credit cards would go away. So most banks would be affected to some degree. But the stocks hit the worst would be the companies whose credit card operations are a larger portion of their overall business. These include American Express, Capital One, and Citibank.

Speaking for myself, I think there’s a low chance of this happening. The proposal would result in the end of rewards cards for high end consumers, as well as credit availability for low income borrowers who need it the most. The scenario of “cap the rates at 10% but everything else stays the same” might be what the President has in mind. But those kind of price controls are not realistic, assuming you want the underlying businesses to remain in business.

Iran Revolts, US Response, and Oil

These days, before I go to bed, I do one last check of the headlines to see if we’ve bombed Iran yet. According to latest news reports, yesterday was a particularly bloody day of the Iranian protests, with “hundreds” killed or wounded by government security forces. President Trump has promised military retaliation if Iran violently reacts to protests in the country. So… we’re waiting.

Needless to say, Ayatollah Ali Khamenei (the Supreme Leader of Iran) is a bad guy. And if he were overthrown, that would be a great day for democracy, and for the economic status of Iranians, and for peace in the middle east, and for lots of reasons. But the question in my mind: how will military action change anything? In fact, it could have the opposite intended effect, if it causes a wave of nationalism against perceived foreign enemies. The key to overthrowing the government will be a fracture in support among key regime leaders. An attack by the US or Israel might actually prevent that.

And so, any direct action by the US would have to be “nuanced”. The WSJ reported yesterday that the President and his top advisors plan to review alternatives on Tuesday. So we’ll see I guess.

What does this matter to us? Well, the impact to the stock market is muted. Especially now, since Russia has no real power to come to the Shah’s assistance. And Iran’s proxies in the middle east have been all but destroyed.

However, there’s always oil! Iran and its vast supply of oil have been under sanction since forever. Iran is the 4th largest producer of oil at the moment. But, because of sanction, most of it goes to China through back channels. If Iran were to come off sanction, that supply would likely increase and hit the broader market, likely causing oil prices to fall even further.

Final Thoughts

It’s almost hard to believe. But earnings season starts tomorrow. As is tradition, the large cap banks will kick things off. JPM will go first tomorrow morning. In my humble opinion, earnings are the primary near-term driver of the stock market. Federal Reserve policy is probably second. After Friday’s tepid job report, interest rate cuts are probably off the table for the moment. So this earnings season will be the main driver of the stock market in the near-term.

There will be no shortage of things to discuss on the call tomorrow! We will look for Jamie Dimon to comment on a variety of topics, but top of mind will be the interest rate cap on credit card rates. More importantly, however, we’ll look for comments on the state of the consumer, particularly at the lower end of the market.