Bank of America (BofA) has warned that the Justice Department’s criminal investigation into Federal Reserve Chair Jerome Powell’s testimony on building renovations could complicate the case for future Fed rate cuts. While markets have largely ignored the news, BofA’s U.S. economist, Aditya Bhave, notes that the investigation might galvanize the hawks on the Federal Open Market Committee (FOMC), making it harder for a potential new, more dovish chair to argue for rate cuts. The muted market reaction to the investigation contrasts sharply with last summer, when President Trump’s suggestion of removing Powell triggered a significant rise in the 30-year Treasury yield.

BofA believes Powell’s forceful response to recent speculation has increased the probability that he will stay on the Fed Board as a Governor after his term as chair ends in May. Polymarket data cited by BofA shows the probability of Powell leaving the board by year-end falling from 83% to 57%. However, the upcoming Supreme Court hearing on Governor Lisa Cook’s case on January 21 is now viewed as more critical for the policy trajectory than the identity of the next Fed Chair.

BofA warns that a ruling against Cook could raise the probability that Powell could face removal as well, further complicating the Fed’s path to rate cuts.