Justice Dept. Legal Threat Complicates Trump’s Pick for Fed Chair

An investigation of the Federal Reserve was thwarted on Friday, but a department appeal could reimpose an obstacle in Kevin Warsh’s path.

For a moment on Friday, Kevin M. Warsh was on a glide path to becoming the next chair of the Federal Reserve.

That afternoon, a federal judge tossed out a pair of subpoenas that the Justice Department had issued to the central bank as part of a criminal investigation into Jerome H. Powell, the Fed’s chair, and his handling of its headquarters renovation.

The inquiry, opened by Jeanine Pirro, the U.S. attorney for the District of Columbia and a longtime ally of President Trump, had been the main obstacle between Mr. Warsh and one of the most powerful economic policymaking jobs in the world.

But Ms. Pirro soon made it clear that the fate of Mr. Warsh — and the president’s desire to appoint more of his supporters to the Fed — remained in her hands.

As a court unsealed the judge’s decision, Ms. Pirro hastily convened a news conference, where she defiantly threatened to continue the fight. In a span of about an hour, a possible pathway for Mr. Warsh narrowed about as quickly as it had emerged, turning instead into his latest political hurdle.

Ms. Pirro’s criminal investigation had rankled several powerful members of the Senate Banking Committee, which oversees the Fed. They included Senator Thom Tillis, Republican of North Carolina, who vowed again on Friday to block Mr. Trump’s choice to lead the Fed until the investigation was scrapped.

“This ruling confirms just how weak and frivolous the criminal investigation of Chairman Powell is, and it is nothing more than a failed attack on Fed independence,” Mr. Tillis said in a statement. “We all know how this is going to end, and the D.C. U.S. attorney’s office should save itself further embarrassment and move on. Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed chair.”

Since returning to office, Mr. Trump has spared no opportunity to try to steer the actions of the Fed, frequently testing the limits of the law. But his administration’s maneuvers threaten to keep the president from what he has sought most: a new leader at the Fed who is more sympathetic to lower interest rates.

At the center of the saga is Mr. Powell, whose term as chair ends in May. Mr. Trump has spent years scolding Mr. Powell, whom he elevated to chair during his first term, for not slashing borrowing costs. In late January, Mr. Trump tapped Mr. Warsh to succeed Mr. Powell, writing that Mr. Warsh, a former Fed governor, would “go down as one of the GREAT Fed Chairman, maybe the best.”

Mr. Warsh is well liked among Republicans, who control the Senate. But lawmakers quickly realized they would have difficulty advancing anyone Mr. Trump picked in the wake of the Justice Department’s criminal investigation.

Republicans had been looking for an offramp that would allow Mr. Warsh’s nomination to proceed. Treasury Secretary Scott Bessent sought to downplay the ramifications of the investigation and made clear his desire to get the confirmation process underway.

“We’ll see where the investigation goes with Jeanine Pirro’s office,” Mr. Bessent said on CNBC last month. “There were subpoenas issued. But that doesn’t have to mean that there are charges.”

The latest entreaty came from Senator Tim Scott of South Carolina, the chair of the Banking Committee. On Wednesday, he said he hoped the investigation into Mr. Powell just “goes away.”

“That proceeding going away allows for us to get the Fed fully functioning, and back on target,” he said. He added that the committee, which has not yet scheduled a confirmation hearing, was “in the process of looking at our calendar and getting him on board as soon as possible”

Instead, the developments on Friday complicated that timeline. Though Mr. Trump announced his selection of Mr. Warsh in January, the president formally sent the nomination to the Senate only last week.

Mr. Warsh shuttled in and out of key Senate offices this week, as he sought to shore up support. A handful of Republicans posted photos on social media afterward to commemorate their meetings.

Without Mr. Tillis’s support, Republicans on the Banking Committee would face an impasse in advancing Mr. Warsh given their razor-thin 13-to-11 majority. Democrats on the committee, including Senator Elizabeth Warren of Massachusetts, have also signaled they will block any of Mr. Trump’s picks.

On Friday, Ms. Warren affirmed her stance that lawmakers should not move any Fed nominations forward until the investigations of Mr. Powell and another Fed governor, Lisa D. Cook, are dropped. Mr. Trump has tried to fire Ms. Cook, triggering a case now before the Supreme Court.

After his term as chair ends, Mr. Powell technically can stay on as a governor until 2028. He has not disclosed his plans, but the legal drama in recent weeks offered fresh insight into his thinking.

In one of the documents unsealed on Friday, the government recounted a late January meeting between the U.S. attorney’s office and lawyers representing the Fed and Mr. Powell. The government claimed that Mr. Powell’s counsel had indicated he would not be inclined to leave the central bank if the federal inquiry remained active.

The government added that Mr. Powell’s lawyer had suggested “it would be a different look to the chair if he was not facing criminal investigation and the chair would be free to make a decision that would focus on his family.”

The Fed later disputed details of that meeting in its own court filing, saying Mr. Powell never offered to resign in exchange for an end to the investigation. To the contrary, they said, he felt the need to remain at the institution during the investigation “to defend the Federal Reserve’s independence.”

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