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Wharton professor warns of Fed's 'already fragile' image as Powell faces probe

Federal prosecutors have reportedly opened a criminal investigation into Federal Reserve Chair Jerome Powell .

The probe is focusing on his June testimony before Congress regarding the central bank's $2.5 billion renovation of its Washington, D.C., headquarters.

During the Senate hearing in June, Powell had defended the renovation project as necessary safety and infrastructure upgrades. He had denied allegations of excessive luxury items and explaining cost changes.

Related: Trump's next Federal Reserve pick could be a crypto executive

In a video statement on Sunday, Powell responded that the investigation was the result of "ongoing pressure" from the administration related to interest rate policy.

"The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President," Powell said.

President Donald Trump has repeatedly criticized Powell over rate hikes, arguing that monetary policy should align more closely with his administration's economic priorities. 

Trump has confirmed he does not intend to renominate Powell when his term expires in May 2026, and has openly suggested he should have a say in rate decisions.

Why the probe matters for crypto

The investigation strikes at the very core of the U.S. financial system's credibility, and that has big implications for crypto.

Bitcoin (BTC) and other digital assets have long been positioned as trustless, decentralized alternatives to politicized monetary systems. If the world's most influential central bank, the Federal Reserve, is perceived as being politically compromised, it strengthens Bitcoin's narrative as a neutral, censorship-resistant form of money.

Investors may increasingly view BTC as a hedge against government interference in monetary policy, particularly if the Fed's decision-making is seen as politically constrained.

Something similar happened in the 2019–2020 standoff between Trump and Powell, when the president repeatedly accused the Fed of keeping rates "too high" and slowing economic growth. 

Trump even claimed he had the authority to demote Powell.

During that period, Bitcoin's "digital gold" narrative gained traction. Investors sought refuge in non-sovereign assets amid concerns over political influence in central banking. 

Ironically, Trump's 2019 tweet declaring he was " not a fan of Bitcoin and other cryptocurrencies" only increased the appeal of decentralized alternatives over fiat.

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Crypto community reacts

The crypto community quickly weighed in on the unfolding situation.

Alex Thorn, head of firmwide research at Galaxy Digital, commented on X:

"Powell says DOJ subpoenas are pretexts for the administration to interfere in monetary policy. Bitcoin's credibly neutral, predictable, transparent, and censorship-resistant monetary policy looks pretty good here."

Crypto Rover added that the development could have broader macro implications:

"This is bullish for #Bitcoin, gold, silver and other hard assets."

Market commentator Max Crypto highlighted the timing of Powell's response:

"DOJ opened inquiry into Fed Chair Powell on Friday. Powell waited till Sunday to respond, right before U.S. stock market futures open. Things are about to get really volatile."

U.S. President Donald Trump and Federal Reserve Chair Jerome Powell tour the Federal Reserve's $2.5 billion headquarters renovation project (Photo by Chip Somodevilla/Getty Images)

Market reacts amid political instability

Historically, instability in U.S. monetary leadership has triggered volatility in the U.S. dollar and Treasury markets, and crypto traders are watching closely.

A criminal investigation into Powell could weigh on traditional markets and spark renewed demand for decentralized stores of value such as Bitcoin.

As of publication, markets showed mixed reactions.

Dow Jones Industrial Average was down 0.15%, while the S&P 500  index was up 0.08%.

The U.S. Dollar Index (DXY) was trading in red at 0.28% at press time.

Meanwhile, major cryptocurrencies were showing upward price movement. As per CoinGecko , Bitcoin (BTC) was trading $92,090.62, having increased 1.2% in the past 24 hours, while Ethereum  (ETH) was trading at $3,130.47 after climbing up by 0.1% in the same time.

Wharton professor warns Federal Reserve's public image

Wharton professor and renowned economist Mohamed El-Erian sounded the alarm on the probe into Powell.

"For those of us who value the operational autonomy of central banks, the risk is that this situation could expose deeper issues—further undermining the credibility of a Fed whose public standing is already fragile," El-Erian said.

He added that the situation unfolding was the one he had feared months earlier when they urged the Chair to resign to preserve the institution's independence. El-Erian urged that the nominee replacing Powell needs to be committed to carrying out the required reforms to restore the credibility and effectiveness of the world's most powerful central bank.

El-Erian is known for his commentary on the broader market and for his neutral to moderate views on crypto.

The probe also comes ahead of U.S. midterm elections on Nov. 4. If the investigation is perceived as politically motivated, it may push monetary independence and crypto regulation to the forefront of national debate.

Meanwhile, the race to replace Powell is already heating up, with Kevin Hassett, Kevin Warsh, and Christopher Waller emerging as early frontrunners for the position. All of the nominees are considered pro-crypto. 

Related: Trump's new Fed Chair to cut 'rates by a lot', sends Bitcoin surging

This story was originally published by TheStreet on Jan 12, 2026, where it first appeared in the Federal Reserve & FOMC News section. Add TheStreet as a Preferred Source by clicking here.

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