A criminal investigation by the Justice Department into Federal Reserve Chair Jerome Powell may influence interest rates, according to TD Cowen analysts. The probe stems from subpoenas served after Powell's testimony about cost overruns in the Fed's $2.5 billion Washington building renovation. Powell claims the investigation isn't about the project but a pretext to undermine monetary policy independence.

Analysts warn this political tension could hinder Powell's potential exit and disrupt efforts to lower mortgage rates, including moves by government-backed entities like Fannie Mae and Freddie Mac to purchase mortgage bonds. Market uncertainty around the Fed’s autonomy could push borrowing costs higher, especially if inflation fears grow. President Donald Trump denied knowledge of the DOJ’s actions, though his past criticism of Powell has fueled speculation.

Should Powell remain in defiance of political pressure, regulatory actions like easing bank capital rules may stall. This drama adds to ongoing concerns about whether the Fed can maintain its data-driven policy course amid intensifying political scrutiny.