Subpoena from the Justice Department backfires? Powell’s dilemma may drag the Federal Reserve into the era of a “shadow chairman.”

```

The latest legal offensive launched by the Trump administration against the Federal Reserve may be facing the risk of backfiring; instead of forcing current Fed Chair Jerome Powell to step down, this move has intensified speculation about his continued presence as a Fed governor after his term as chairman ends in May 2026.

Last week, the U.S. Department of Justice issued a grand jury subpoena to the Federal Reserve, an action seen as an escalation of Trump’s attempt to intervene in monetary policy. However, this move has actually reinforced an expectation among Fed watchers: even if Powell himself has no desire to remain in the position, he may choose to stay to defend the institution’s independence. If this scenario plays out, the Fed could see the emergence of a powerful “counterbalance” within its ranks apart from the new chair.

Former Cleveland Fed President Loretta Mester warned that, this power structure could evolve into a “two popes” situation. In this environment, the financial markets and the public may be confused about who holds the real authority and where interest rates are headed. Although Powell’s allies say he has no intention of acting as a “shadow chairman,” his expertise and record of defending the institution inevitably make him seen as another authoritative voice.

Currently, Fed officials have signaled that they may keep rates unchanged until more inflation and employment data is available. Although this event has not directly impacted short-term monetary policy yet, its resulting political and legal turmoil poses a threat to Trump’s succession plans. Key Republican member of the Senate Banking Committee, Thom Tillis, has made it clear he will oppose any Trump nominee until this dispute is resolved, further heightening uncertainty about future Fed leadership.

“Two Popes” Dilemma and Market Concerns

If Powell continues as governor after stepping down as chairman, the Fed may face a highly unusual power dynamic. Former Cleveland Fed President Loretta Mester has described this as a “two popes” scenario, meaning financial markets and the public may be confused about “who is in charge.”

Northern Trust Asset Management’s global macro head and Powell’s former advisor, Antulio Bomfim, said that, although Powell himself does not desire to be a “shadow chairman,” his reputation as former chair, experience, and record of defending the institution will inevitably make him seen as another authoritative voice within the Fed. Even if Powell does not seek confrontation, the objective effect of dual centers of influence could leave investors struggling to interpret monetary policy signals.

This situation would not only make it tough for Trump’s nominated chair to establish authority, but could also deepen market volatility. Investors are used to finding policy guidance in the words of the Fed chair; with a “shadow chairman” within the committee, consistency in policy communication would be severely challenged.

Subpoena Turmoil and Powell’s Strong Rebuke

For a long time, Powell has been silent about his future plans; most Fed watchers previously expected he would leave the central bank in May next year. However, the Justice Department’s subpoena changed that expectation. Reportedly, the subpoena involves Powell’s testimony last June to Congress about the Fed’s headquarters renovation project.

On January 11th, Powell issued a rare and fierce rebuttal through written and video statements. He said the legal action should be seen as part of a “background of government threats and sustained pressure.” Powell stated bluntly: “The threat of criminal charges is because the Federal Reserve sets interest rates based on our best judgment to serve the public, not the preferences of the president.”

It is precisely this strong response that has sparked widespread speculation that Powell might choose to stay on to resist administrative interference. While his term as chair will end in May 2026, his term as Fed governor will continue until January 2028.

Political Game and Succession Challenges

The Trump administration’s aggressive tactics have also created political obstacles for the succession plan of the Fed chair. Key Republican Senator Thom Tillis of the Senate Banking Committee has vowed to oppose any Trump nominee until the legal issue is resolved. This means confirmation of a new chair could be deadlocked.

Trump previously stated he has selected Powell’s successor, but the name has not been disclosed. National Economic Council Director Kevin Hassett and former Fed governor Kevin Warsh are seen as front-runners. Steven Kamin, senior fellow at the American Enterprise Institute, points out that while the FOMC usually seeks to cooperate with a new chair, if the new chair is sufficiently divisive, FOMC members may rally behind Powell, forming a kind of alliance.

According to media citings of sources, there is growing concern within the Trump administration and its allies that this escalation may anger many sitting governors and regional Fed presidents, making it harder for the new chair to implement policies.

Struggle for Control and the Potential "Nuclear Option"

If Powell chooses to remain as governor, the most direct impact would be to delay Trump’s opportunity to appoint another governor, thereby hampering his plan to secure a majority of seats on the Fed’s board. Trump has long sought majority control of the board to exert greater influence over personnel, regulation, and institutional management, including using board votes to remove non-presidentially appointed regional Fed presidents.

David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution, analyzes that if the FOMC refuses to cooperate with Trump’s appointed chair and regional Fed presidents become obstacles, Trump may pressure the board to fire one or more presidents.

Furthermore, an upcoming Supreme Court hearing may be a game changer. The Supreme Court is set to hear a case on January 21 concerning the dismissal of Fed governor Lisa Cook (involving allegations of mortgage fraud). If Trump wins the right to dismiss Lisa Cook, this could open the door to firing any Fed governor, including Powell, completely reshaping the Fed’s power structure.

On monetary policy, though the political storm rages on, the Fed’s decision-making so far remains unaffected. Last month, decision-makers lowered the benchmark rate for the third consecutive time and indicated that rates may be kept unchanged this month to await further inflation and employment data. But as the drama over Powell’s future unfolds, the path of future policy is growing increasingly uncertain.

Risk Warning and DisclaimerThe market carries risk, investment requires caution. This article does not constitute personal investment advice, nor does it consider the unique investment objectives, financial circumstances, or needs of individual users. Users should consider whether any opinions, views or conclusions in this article suit their specific circumstances. Investments made accordingly are at their own risk.

```