What's at stake in Trump's war on Powell

Some bells you can't unring. Some doors are one-way. The United States is about to find out whether the attempted criminal prosecution of its central banker is one of those.The big picture: The news Sunday night that President Trump's Justice Department is conducting a criminal investigation into Federal Reserve chair Jerome Powell over his Congressional testimony on the Fed's building project is a remarkable escalation of the president's long-running feud with Powell over interest rate policy.Powell's term is up in May, but the consequences of this development will haunt his successor.The next Fed chief was already set to face skepticism in financial markets over whether monetary policy will be set based on hard economic reality versus presidential whims.The fact that the administration has shown willingness to use the full might of the U.S. government, including the threat of criminal charges, against the Fed chair will make overcoming that skepticism all the harder.What they're saying: "This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly," said a joint statement issued Monday morning signed by every living former Fed chair and numerous other former high officials."It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success," they wrote.State of play: Powell, in a stunning — and very un-Fed-like — video statement issued Sunday night, made no bones about it. This, he said, isn't about legitimate oversight of the Fed's building project, but about punishing him for not delivering the interest rate cuts Trump seeks.A key defender of central bank independence, Sen. Thom Tillis (R.-N.C.), said that "it is now the independence and credibility of the Department of Justice that are in question" and that he will oppose confirmation of any Fed nominee, including for the chairmanship, until the matter is "fully resolved."It all comes as the Supreme Court prepares to hear a case about whether Trump can fire another Fed governor, Lisa Cook, over dubious accusations involving her home mortgage applications.Between the lines: Markets have largely made peace with Trump's ongoing attacks on Powell. Investors have remained confident that the attacks are just political noise, and that when push comes to shove, the Fed will remain independent and do what is necessary to keep inflation in check.But this out-in-the-open war over the Fed could break that complacency, particularly if it changes those bedrock assumptions.It raises the odds that the next Fed chair will face a credibility gap internally and externally. How persuasive will the chair be in making the economic case for rate cuts when we've now seen what consequences a Fed chair can face for failing to deliver them?It also raises the incentive for Powell to gum up the works in the president's efforts to remake the Fed by remaining in his seat as a governor, which doesn't expire until 2028, rather than stepping down when his term as chair ends in four months.Data: FactSet; Chart: Axios VisualsStocks, bonds and the dollar sold off on the Powell news. But the moves have been modest — and hardly suggestive of a major repricing of risk.By the numbers: Ten-year Treasury yields, which move in the opposite direction from their prices, were up only slightly as of 10:30am ET, up two-hundredths of a percentage point. The S&P 500 was little changed as of 12pm ET.Zoom out: This has been a pattern throughout the last year of Trumpian assaults on traditional aspects of America's economic governance.There may be selling at the margins, but the overall sense of forward momentum has proven more powerful, and market sell-offs have been mostly brief and mild.The exception was around the "Liberation Day" tariffs last April, which was more severe — but also short-lived after Trump backed away from some of the most extreme duties."I'm surprised the market isn't more concerned," former Fed chair Janet Yellen said Monday morning on CNBC. "It seems to me that the market should be concerned."Zoom in: Financial markets are bad at pricing in tail risks and events with low odds but high consequences.In that sense, the AI boom, solid consumer spending and rising corporate earnings are a bigger deal than attaching some low odds that the Fed loses its credibility and allows inflation to get out of control.The bottom line: As the Liberation Day experience showed, stock and bond markets can act as more of a constraint on the Trump administration than tut-tutting by former government officials.And so far, the markets' reaction to the Powell news is adverse, but not a run-for-the-hills alarm.Go deeper... Scoop: Bessent told Trump that investigation of Fed chair creates a "mess"