President Donald Trump called for former Federal Reserve Chair Jerome Powell to resign from the Board of Governors immediately over cost overruns in the renovation of the Fed's Washington headquarters. Trump stated the project is now expected to cost at least $2.5 billion, potentially rising to $4 billion, and demanded legal action for corruption or incompetence.

The Federal Reserve Office of Inspector General (OIG) concluded that no administrative misconduct occurred during the renovation of the Eccles Building. The review addressed a significant budget expansion that had sparked dispute involving then-Fed Chair Jerome Powell, Donald Trump, and U.S. Attorney Jeanine Pirro. While the OIG cleared officials of criminal wrongdoing, it identified specific management deficiencies within the project's oversight structure.

Escalating political pressure

In a Truth Social post, Trump declared the renovation "Hundreds of Millions of Dollars over budget." He asserted that the project, initially projected to cost $1.3 billion in 2020, saw its board-approved budget climb to $2.4 billion by August 2026. Construction expenses alone rose by $960 million. Trump stated, "This is Jerome Powell’s fault, and he should be forced to resign, IMMEDIATELY! If he doesn’t resign, he should be sued, at the highest level, by the United States Government, for either corruption or incompetence."

Trump confirmed he asked Attorney General Todd Blanche to review the OIG report and determine next steps. This follows a Department of Justice decision in late April to drop its criminal probe into Powell, which had cleared the way for Kevin Warsh's appointment as the next Federal Reserve Chair. Powell had stated he would remain on the board until the investigation was "well and truly over," with his governor term running through January 2028.

OIG findings on management practices

The OIG report stated that mismanagement and weak oversight drove the cost overruns, though it stopped short of flagging any criminal conduct. "At no point during our evaluation did we find reasonable grounds to believe that a violation of federal criminal law had occurred requiring a referral to the U.S. Attorney General," the report noted. This finding effectively closes a chapter of political tension regarding criminal liability, though administrative issues remain.

Investigators found the Fed never locked in a guaranteed maximum price for the project and lacked a system to flag ballooning costs to senior leadership in time. New disclosures indicate that specific design elements, including marble, water features, and a garden terrace, did not materially contribute to the cost overruns. To address the identified management deficiencies, the Fed Board will establish fixed metrics for the remaining project budget and schedule in conjunction with Forst. Forst is required to report directly to the Fed's Board and Chairman, ensuring tighter control over future expenditures.

Cost drivers and inflation impact

Broader inflation accounted for only part of the budget jump. Producer prices rose 16% over the construction period, but plumbing and HVAC costs alone more than tripled, rising 223%. The OIG's distinction between administrative mismanagement and criminal misconduct highlights the complexity of large-scale government construction projects where sector-specific inflation can outpace general indices significantly.

What the numbers show

The primary metric of concern was the variance between planned and actual construction costs, with total approved budgets nearly doubling from $1.3 billion to $2.4 billion. The OIG's decision to withhold a criminal referral suggests that while the financial overrun was substantial, it did not stem from intentional fraud. However, the divergence between general producer price inflation (16%) and specific construction input inflation (223% for plumbing/HVAC) indicates that sector-specific supply chain pressures were a major driver, rather than just broad economic inflation. The lack of a guaranteed maximum price contract left the Fed exposed to these volatile input costs without adequate early warning systems for leadership.

Another Federal Reserve rate hike is difficult to justify, said Truflation Head of Data Oliver Rust, arguing that underlying inflation is cooling despite pressure from energy and tariffs. This view follows a downward revision of August inflation data that slashed October rate hike odds to 37.1% from 70.9% last week.

The Bureau of Economic Analysis lowered July headline PCE inflation to 3.4% from 3.7% and core PCE to 3% from 3.3%. These shifts were driven by annual national accounts revisions rather than a genuine easing of price pressures. Monthly core PCE rose 0.2% in August, below the 0.3% consensus expectation.

Technical revisions drive headline decline

Michael Pearce, chief U.S. economist at Oxford Economics, stated that the downward revision primarily reflects improved measurement methods for computer software and portfolio management fees. "The changes were well telegraphed and Fed officials will have accounted for most of this already in their outlooks," Pearce said.

Peter Williams, an economist at 22V Research, noted that the revisions were concentrated in non-market services, which are not observed directly in transactions and tend to be noisier. Consensus had expected core PCE at 3.2% after revisions, but the print came in at 3%. Williams added that he "wouldn't place too much emphasis on this print for the Fed."

Truflation challenges rate hike rationale

Oliver Rust told Benzinga that he does not understand how another increase can be justified. The Fed under Chair Kevin Warsh raised rates by 25 basis points to 3.75%-4.00% on September 16, its first hike since 2023, aiming to prevent elevated price pressures from spreading. Rust argued that higher rates cannot solve the energy supply shock caused by the Iran conflict.

"I can jack up interest rates another 25 basis points but it’s still not going to solve my supply problem," Rust said. He suggested market expectations may have played a role in the previous hike, noting traders had largely priced it in and that Warsh risked losing credibility if he surprised them by holding rates steady. Polymarket traders now think there is a 64% chance of the Fed holding rates steady in October, up from roughly 31% on Tuesday.

Services inflation remains elevated

While headline numbers softened, specific measures tracked by the Fed for wage-driven inflation moved higher. Services prices excluding energy and housing rose 0.4% in August, up from 0.1% in July. A narrower version of this measure, which also strips out non-market prices, posted its hottest monthly reading since summer 2022.

Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, emphasized that the Fed seeks falling inflation because price pressures are easing, "not because the way it's measured changes." Adams noted, "You don't need your glasses on to tell the difference between 3% core PCE inflation and a 2% target."

Growth revised higher amid consumer spending

Real gross domestic product growth for the second quarter was revised up to 2.2% annualized from 1.5%. First-quarter growth was also revised to 2.5% from 1.2%. Pearce attributed most of these gains to sectors exposed to artificial intelligence, including IT equipment, data centers, and research and development.

Consumer spending remained robust despite slower income growth. Personal spending rose 0.9% in August, while income grew only 0.2%, missing the 0.5% consensus. Consequently, the saving rate fell to 4.1% from 4.6% in July, reaching its lowest level since late 2022. Reuters analysis found 51% of PCE components were still rising at annual rates above 3%, suggesting price pressures remain broader than normal.

Rust dismissed the spending surge as a likely one-off anomaly, noting that spending rose more than four times as fast as income while savings fell. He argued that consumers cannot sustain this pace if energy costs fall and lower-income households pull back, though wealthier households helped by a strong stock market may continue spending.

Market reaction and bond yields

Treasury yields reversed initial declines after the data release. The two-year yield, sensitive to Fed policy expectations, remained little changed at 4.89% by early afternoon. The 10-year yield rose about 5 bps to 5.30%, and the 30-year yield increased about 5 bps to 5.65%.

Bond ETFs reflected mixed sentiment. The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) fell 0.82% to $77.59, while the iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) lost 0.32%. The short-term iShares 1-3 Year Treasury Bond ETF (NASDAQ: SHY) remained flat at $81.18. Private employers added 90,000 jobs in September, according to ADP, exceeding forecasts. The SPDR S&P 500 ETF Trust (NYSE: SPY) traded higher Wednesday as stocks rallied following the softer-than-expected inflation report, with the S&P 500 up about 0.6% by midday.