Powell investigation upends final stretch of Fed Chair contest

The episode is creating new obstacles on Capitol Hill and raising hard questions about whether any nominee can be seen as independent—tension that was always present but is now much harder to ignore. Trump has made clear he prizes loyalty in his pick, but the Justice Department probe—which Powell said was part of a pressure campaign to get the Fed to lower interest rates—threatens to make that quality a liability.

The backlash on Capitol Hill could force that pick to walk a tightrope in any confirmation process this spring. The nominee would have to avoid upsetting Trump with statements that question his efforts to challenge the Fed without provoking concerns from lawmakers or market participants that they are too close to Trump to be credible.

“Trump is making it very difficult by saying he refuses to appoint anyone who doesn’t agree with him and is not going to do what he wants," said Janet Yellen, the former Fed chair and Treasury secretary. “So you start with that, which undermines a person’s credibility."

In a sign of some lawmakers’ unease, two Republican senators—Thom Tillis of North Carolina and Lisa Murkowski of Alaska—said this week they won’t vote for any nominee until the probe is resolved.

“I wouldn’t consider my mother for the post under the current conditions, because we’ve got to resolve this matter," Tillis said earlier this week. “It’s foundational to making decisions about the board going forward."

Tillis, who sits on the Senate Banking Committee that oversees Fed nominations, has become a vocal, regular critic of the Trump administration. In this case, his complaints are more than just talk: He could hold up the nomination with backing from Democrats.

Tillis suggested that candidates seen as closer to Trump would face harder questions about their independence. “If you’re working alongside somebody for a while, can you really be as independent, even if you think you can be?" he said Wednesday.

Choosing Fed governor Christopher Waller, who is one of four contenders for the job and who doesn’t have a close relationship with the president, “would certainly address a lot of the concerns," said Tillis.

Other analysts said Waller’s biggest liability—that lack of any real ties to Trump or his inner circle—could be an asset if the confirmation process becomes a referendum on Fed independence. The president appointed Waller to the Fed in 2020.

Last week, Treasury Secretary Scott Bessent said Trump would soon interview one last finalist, Rick Rieder, a BlackRock executive. Rieder was spotted at a White House event on Thursday honoring the Florida Panthers’ Stanley Cup championship.

But the battle has always been between the two Kevins: former Fed governor Kevin Warsh, and the director of the White House National Economic Council, Kevin Hassett.

Hassett’s close relationship with Trump made him a leading contender for the job. Now, it might be a liability.

Hassett demonstrated the difficulty of his position this week. He began one interview on Monday by saying, “I hope everything turns out OK for Jay," but then he attempted a defense of the investigation as a legitimate exercise in government oversight—putting him at odds with lawmakers who have called it a political hit job.

“If I’m here sitting here in the White House and somebody says, ‘Hey, Justice Department wants to look at all your emails or look at what you’ve been doing on this or that,’ then I would welcome the opportunity to show them that I’m fine," Hassett said on CNBC.

He compared the criminal probe to routine oversight. “It’s part of government to have people look at you—inspectors general—and check that what you’re doing is completely on the up and up."

His comments prompted a backlash from economists and other analysts who said they were inappropriate for someone looking to lead the central bank. “It was sad but unsurprising to see him accepting this as an aboveboard, legitimate, independent inquiry," said Jason Furman, a former economic adviser to President Barack Obama. Furman helped organize a letter supporting Hassett’s 2017 Senate confirmation as chair of the White House Council of Economic Advisers for Trump’s first term.

Trump has kept his own advisers guessing. One person familiar with the process said the contest remains between Warsh and Hassett, and the front-runner “sort of depends on the day." While the president recently indicated to advisers that he might prefer keeping Hassett in his current post because he likes how Hassett defends his policies on television, other advisers have been working on identifying a successor if Hassett leaves for the Fed.

Trump, who has for months suggested the decision was imminent, said this week he might announce his pick within weeks. “The president is in the same place" he has been “for many, many weeks. He’s in a decision-making phase," White House press secretary Karoline Leavitt said Thursday. “There are a few people who he likes very much for this job, maybe less than that."

The U.S. attorney in Washington, D.C., Jeanine Pirro, said in a Fox News interview on Tuesday that her office is investigating whether Powell lied to Congress last summer about the Fed’s building renovation project. Powell, in announcing the probe on Sunday, said it was a pretext to intimidate the central bank to cut interest rates, as Trump has demanded for months.

Lawmakers from both parties have questioned the basis for the probe, and several Republicans have said they don’t want the investigation to escalate into criminal prosecution.

Larry Kudlow, who was the director of the National Economic Council in Trump’s first term, told viewers of his Fox News program on Monday that the president wouldn’t be able to confirm his Fed chair pick until the investigation against Powell has been withdrawn. Powell’s term expires in May.

Some Trump allies who have supported both Hassett and Warsh for the job said any escalation in the criminal investigation of Powell could further tarnish Hassett’s standing with the Senate and his future Fed colleagues given his White House role. These people said that could give Warsh an edge by leaving him in relatively better standing with lawmakers and central bank insiders.

Trump was impressed by Warsh in an interview last month, telling associates over the holidays that he was struck by his acumen and good looks, according to people familiar with the matter.

Warsh, who served on the Fed’s board from 2006 to 2011, hasn’t spoken publicly on the investigation. Unlike Hassett, who works in the White House, he doesn’t face a regular balancing act of defending controversial attacks against the Fed or its leaders.

But before the probe became public, Warsh had publicly dismissed concerns about Trump’s attacks on the Fed, suggesting Powell had brought them on himself.

Last fall, Warsh disparaged a brief to the Supreme Court signed by all former living Fed chairs and a bipartisan group of Treasury secretaries. They warned the Fed’s independence from the White House would be lost if the president succeeds in his attempt to fire Fed governor Lisa Cook. “I did not know that senior economic officials’ at the Treasury and the Federal Reserve expertise went all the way to constitutional jurisprudence," he told Barron’s.

There is a final practical consideration that has grown more significant since Sunday. The Trump administration has been focused on ensuring Powell departs entirely when he steps down as chair. While Powell’s chairmanship expires in May, his term as a governor runs until January 2028.

The investigation raises the prospect that Powell won’t leave if the administration tries to use it as leverage to compel his resignation. But analysts say Powell is more likely to vacate his seat if Waller is the pick—a respected colleague with whom he has worked closely.

That would give Trump an extra seat to fill on the board and a total of two this year: One when the term of Fed governor Stephen Miran expires at the end of this month, and then Powell’s in May.

Write to Nick Timiraos at Nick.Timiraos@wsj.com, Siobhan Hughes at Siobhan.hughes@wsj.com and Josh Dawsey at Joshua.Dawsey@WSJ.com