Jerome Powell Departs as Federal Reserve Chair

On May 15, 2026, Jerome Powell walked out of the Eccles Building for the last time as chair of the Federal Reserve. He left behind an institution battered by a DOJ criminal investigation, a presidency openly hostile to its independence, and an economy running hotter than anyone on the Federal Open Market Committee wanted. His parting words to reporters — "I won't see you next time" — were characteristically understated [1]. But it was six other words, spoken months earlier, that may define his legacy on Wall Street.

"Equity Prices Are Fairly Highly Valued"

In September 2025, during a speech in Rhode Island, Powell was asked how the FOMC accounts for equity valuations when setting monetary policy. His response — "equity prices are fairly highly valued" — broke with decades of Fed convention [2]. Sitting chairs almost never comment directly on stock market levels. The job of the FOMC is to pursue price stability and maximum employment; asset prices are supposed to be left to the market.

The last time a Fed chair made a comparable remark was December 1996, when Alan Greenspan warned of "irrational exuberance" in a speech at the American Enterprise Institute. That phrase became one of the most cited in financial history. But the S&P 500 nearly tripled in the four years after Greenspan said it, before the dot-com crash proved him right [2].

Powell's six words landed in a different environment. As of May 13, 2026 — the day the Senate confirmed his successor — the Shiller CAPE Ratio stood at 42.32, its highest reading during the current bull market and the second-most-expensive valuation in 155 years of data, trailing only the dot-com bubble peak of 44.19 in December 1999 [2]. Every prior instance in which the CAPE exceeded 30 was followed by a decline in major indexes ranging from 20% to 89% [2].

Source: Robert Shiller / Yale

Data as of May 13, 2026CSV

Whether Powell intended a warning or simply answered a question honestly, the timing gives his words weight. His successor inherits an equity market priced for perfection at a moment when the macro backdrop — inflation at 3.8%, geopolitical conflict, and a divided FOMC — is anything but perfect.

The Timeline: How Powell Left

Powell was not removed. He was not forced to resign. His second four-year term as chair simply expired on May 15, 2026, and he chose not to seek reappointment — a decision made easier by the fact that President Trump had already nominated Kevin Warsh as his replacement [1][3].

But "simply expired" understates the pressure campaign that preceded it. In January 2026, the Department of Justice served the Federal Reserve with grand jury subpoenas, ostensibly related to cost overruns on the Fed's headquarters renovation project in Washington, D.C. Powell responded with a rare video statement characterizing the investigation as politically motivated — an attempt to pressure him into cutting rates or stepping aside [4][5].

A federal prosecutor told a judge that the office lacked evidence of any crimes. A federal judge twice quashed DOJ subpoenas issued to Powell, finding the investigation was "aimed at pressuring Powell to yield to Trump to cut rates or resign" [5]. On April 24, 2026, U.S. Attorney Jeanine Pirro announced the closure of the criminal probe, referring the matter instead to the Fed's inspector general [5].

Powell's decision to stay on as a governor after stepping down as chair — the first former chair to do so since Marriner Eccles in 1948 — was itself a statement. "The institution is being battered over these things," Powell said, explaining why he would remain as one of 12 voting FOMC members [6]. He added that he had been "encouraged by recent developments" after the probe's closure but would only consider leaving "until this investigation is well and truly over" [1].

Kevin Warsh: The Most Partisan Fed Chair in Modern History

Kevin Warsh was confirmed on May 13, 2026, in a 54-45 vote — the narrowest for a Fed chair in the modern era [7]. Every Republican voted in favor. Every Democrat voted against, except Sen. John Fetterman of Pennsylvania, who crossed the aisle. Sen. Kirsten Gillibrand missed the vote [7].

The opposition was pointed. Sen. Elizabeth Warren called Warsh Trump's "sock puppet" and warned his confirmation would "erode the central bank's independence from the executive branch at the exact moment when that independence is most needed to credibly fight inflation driven by the Iran conflict and tariff policies" [7].

Warsh, 55, is a former Morgan Stanley executive who served on the Fed's Board of Governors from 2006 to 2011 under George W. Bush, making him the youngest governor in the institution's history at the time of his initial appointment. He helped steer the central bank through the 2008 financial crisis [3]. Since leaving the Fed, he has publicly disagreed with its policies on multiple occasions, arguing the central bank's balance sheet had grown too large and that monetary policy was too accommodative.

During his confirmation hearings, Warsh vowed to be an "independent actor" and said he would not set policy based on Trump's views [8]. But his documented positions create tension with that pledge. Warsh has signaled openness to cutting rates earlier than the consensus of the current FOMC, and he has advocated shrinking the Fed's $6.7 trillion balance sheet — moves that would, conveniently, align with the administration's stated desire for cheaper borrowing costs [8][9].

Markets: Priced for Gridlock

The transition has produced more anxiety than panic. The stock market reaction was mixed in the days surrounding the handoff, with Treasury yields climbing as investors adjusted expectations for a higher-for-longer rate environment [10].

Source: FRED / Federal Reserve Board

Data as of Apr 1, 2026CSV

The federal funds rate stands at 3.50%–3.75% after the FOMC's April 29, 2026, meeting — its final meeting under Powell's leadership — where the committee voted to hold rates steady [11]. The CME FedWatch tool now shows over 98% probability of no change at the June 16–17 meeting, Warsh's first as chair [11]. Markets that began the year pricing in one to two rate cuts have shifted to pricing in zero cuts for all of 2026 [11].

The reasons are clear in the data. April's Consumer Price Index showed a 3.8% year-over-year increase — the highest since May 2023 — with a 0.6% monthly jump that caught analysts off guard [12]. The bond market has responded accordingly: the 10-year Treasury yield has climbed to 4.47% in mid-May 2026, reflecting persistent inflation expectations [13].

Source: FRED / Bureau of Labor Statistics

Data as of Apr 1, 2026CSV

Source: FRED / Federal Reserve Board

Data as of May 14, 2026CSV

The sectors most exposed to a prolonged hold are predictable. Housing, where the 30-year fixed mortgage rate remains elevated, continues to see depressed transaction volumes. Auto lending, heavily dependent on rate-sensitive consumer credit, faces margin compression. Small business credit, already tightening since 2023, shows no signs of loosening [9].

The Case Against Powell: What He Got Wrong

The steelman case that Powell's departure was overdue rests primarily on 2021 and 2022. As inflation surged past the Fed's 2% target in mid-2021, Powell and the FOMC kept the federal funds rate near zero. The central bank was simultaneously pumping $120 billion per month into the financial system through quantitative easing, even as the economy was rapidly healing from the pandemic [14].

Powell's characterization of inflation as "transitory" — a word he used repeatedly through most of 2021 — proved to be among the most consequential misjudgments of his tenure. By the time the Fed began raising rates in March 2022, inflation by the CPI measure had hit 8.5% annually [6][14].

Mickey Levy, a former top economist at Bank of America and a visiting fellow at the Hoover Institution, offered a blunt assessment: "Even though there was all the evidence there in the data that aggregate demand was going through the roof, they still said it was a transitory supply shock. The Fed contributed to that inflation and completely misread the tea leaves" [14].

James Bullard, who served 15 years as president of the St. Louis Fed, told CNN that criticism of the transitory framing was "fair" [14]. Powell himself acknowledged the error in November 2021, telling Congress: "I think it's probably a good time to retire that word" [14].

The counterargument, advanced by Powell's defenders, is that the eventual course correction worked. The aggressive rate-hiking campaign that followed — raising the benchmark rate to levels not seen since 2001 — brought inflation from its peak of 9.1% in June 2022 down to 3% by June 2023, without triggering the recession that most economists predicted [6]. The unemployment rate in April 2026 was 4.3%, virtually unchanged from where it stood when Powell took office in 2018 [6]. David Wessel of the Brookings Institution summarized the defense: "His enduring legacy will be that he protected the Fed's independence at a time of unprecedented challenges" [6].

The Legal Architecture of Fed Independence

The Federal Reserve Act provides that members of the Board of Governors may be removed by the president only "for cause" — a term historically interpreted as misconduct or incapacity, not policy disagreement [15]. No sitting Fed chair has ever been removed by a president.

The legal landscape around this protection is unsettled. The Supreme Court, in recent rulings on independent agency leadership, has signaled willingness to revisit the constitutionality of for-cause removal protections. But the Court went out of its way to distinguish the Fed, writing that it "is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States" [15].

Constitutional scholars remain divided. Some argue that the DOJ investigation, even though it was ultimately dropped, crossed a line by using the threat of criminal prosecution to apply pressure on a sitting Fed chair. Others contend that no formal removal occurred, and therefore no constitutional boundary was tested — an argument that amounts to saying the system held precisely because Powell's term expired before the pressure could escalate further [15][16].

Powell's decision to remain on the board as a governor adds a novel dimension. As a voting member of the FOMC, he can still dissent from Warsh's policy direction — a quiet but meaningful check on any rush to accommodate the administration's preferences.

The World Is Watching

The transition has drawn attention far beyond Washington. In January 2026, after the DOJ probe was announced, the European Central Bank issued a statement noting that central bank independence "is critical for economic stability and must be preserved with full respect for the rule of law and democratic accountability." ECB President Christine Lagarde expressed "full solidarity" with Powell [17].

The dollar's position as the world's dominant reserve currency, meanwhile, continues to erode. IMF data show that USD-denominated foreign exchange reserves fell to 56.8% of the global total in Q4 2025 — the lowest share since 1994 [18]. Central banks are diversifying aggressively: China has added to its gold reserves for 18 consecutive months through April 2026, pushing official holdings to over 2,322 tonnes while reducing U.S. Treasury holdings. France has signaled its own de-dollarization moves [18].

The combined share of "non-traditional reserve currencies" — smaller currencies beyond the dollar, euro, yen, and pound — has more than doubled since 2021, reaching 6.1% [18]. Central bank gold holdings have surged to 1,175 million troy ounces, valued at approximately $5.27 trillion at current prices [18].

None of this is solely attributable to the Powell-Warsh transition. De-dollarization trends predate it by years. But the spectacle of a DOJ investigation into a sitting Fed chair, followed by the most partisan confirmation of his successor in history, has done nothing to reassure foreign holders of dollar-denominated assets that U.S. monetary institutions remain above the political fray.

What Comes Next

Warsh inherits an economy that Mark Zandi of Moody's Analytics described as "pretty good but far from perfect" [6]. Inflation is reaccelerating. The FOMC is divided. Markets are pricing in no rate relief. And the new chair arrives carrying the political expectations of a president who has made cheap borrowing costs a public priority.

Warsh's first FOMC meeting is June 16–17. CNBC has reported that he is likely to face a "good family fight" if he pushes for rate cuts, with several committee members opposed to easing while inflation remains above target [8]. His plans to shrink the balance sheet — currently $6.7 trillion — face their own constraints from rising federal debt and diminished foreign appetite for Treasuries [9].

Powell, for his part, will be in the room. Not as chair, but as a governor with a vote and a legacy to protect. Whether he speaks up or stays quiet, his presence on the board is a reminder that the Fed's independence was tested and — at least for now — survived.

His six words about equity valuations will be the easiest claim to verify. The CAPE ratio at 42.32 will either correct toward historical means, vindicating the warning, or climb higher into uncharted territory. Either way, the market heard him.