The Justice Department on Friday dropped its criminal investigation of Federal Reserve Chair Jerome Powell, lifting the last political obstacle to Senate confirmation of Kevin Warsh as Powell's successor and resetting a fight that has consumed the central bank for months. U.S. Attorney Jeanine Pirro of the District of Columbia announced the decision in a post on X and said she would refer the Fed's headquarters renovation to the central bank's inspector general instead.

The move clears Sen. Thom Tillis, the North Carolina Republican who had held up Warsh's nomination on the Senate Banking Committee, to vote the nominee out of committee. It also leaves Powell with a decision he had said he would defer until the probe was over: whether to stay on as a Fed governor when his term as chair expires next month, or walk away and give President Trump another seat on the seven-member board.

What changed Friday

Pirro had said as recently as Wednesday that she was committed to continuing the criminal probe, even after a federal judge in March quashed subpoenas her office had issued to the Fed and described the investigation as an act of intimidation aimed at pressuring the central bank to cut interest rates. On Friday she reversed course. "Accordingly, I have directed my office to close our investigation as the IG undertakes this inquiry," Pirro wrote on X, adding that she would "not hesitate to restart a criminal investigation should the facts warrant doing so."

The Fed's inspector general has already reviewed the Washington renovation twice and found no wrongdoing, according to NPR. A spokesperson for the inspector general told CNBC the office is "actively working to complete" an evaluation of the project and will release the results to Congress and the public when it is done. Costs for the two-building project have risen from $1.9 billion to $2.5 billion, which the Fed has attributed to excess lead, asbestos and construction inflation.

Tillis gets his condition

Tillis, who is retiring, said at Tuesday's confirmation hearing that he would not advance Warsh while the criminal probe was open. "If we put everybody in prison in federal government that had had a budget go over, we'd have to reserve an area roughly the size of Texas for a penal colony," Tillis said, according to NPR. He had not issued a public statement by Friday afternoon, but markets treated the matter as settled. On the prediction-market platform Kalshi, the implied odds that Warsh is confirmed by May 15 jumped to 86 percent from about 30 percent before the announcement, and to more than 97 percent by June 1, CNBC reported. Polymarket showed an 81 percent chance of confirmation by mid-May.

Banking Committee Chairman Tim Scott, R-S.C., said in a statement he welcomed the inspector general's review and had invited the office to brief the committee within 90 days. The White House "remains as confident as before that the Senate will swiftly confirm Kevin Warsh as the next Federal Reserve Chairman to finally restore competence and confidence in Fed decision-making," White House spokesman Kush Desai said.

Powell's call

Powell, whose term as chair ends May 15, has not said whether he will give up his seat as a governor, which runs to 2028. He may signal his intentions Wednesday at the news conference following the Federal Open Market Committee meeting. Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote that the timing of the DOJ reversal complicates a clean exit. "Powell has kept his cards close to his chest. If the investigation had never taken place we think he would have left the Fed completely on May 15," Guha said in a note. He now expects Powell to stay on as a regular governor for some months to avoid the appearance of leaving under pressure.

If Powell does step down, Trump would be able to name a third sitting governor on top of Warsh, joining Christopher Waller and Michelle Bowman from his first term. David Zervos, chief market strategist at Jefferies and himself an interviewee for the chair job, told CNBC that markets would welcome a clean handoff. "A statement by Jay saying he'll be leaving at the end of his term as chair, will actually cause the market to go up, the rates market to be more positive, meaning lower yields, higher prices," Zervos said.

The counterpoint

Democrats called the announcement a procedural maneuver rather than a resolution. Sen. Elizabeth Warren of Massachusetts, the ranking Democrat on Banking, said the move "is just an attempt to clear the path for Senate Republicans to install President Trump's sock puppet Kevin Warsh as Fed Chair." Warren noted that the Justice Department had not dropped a separate criminal probe of Governor Lisa Cook, whose firing Trump has sought and who remains on the board while the Supreme Court considers her case. No conservative or right-leaning outlet was represented in the reporting available for this article; Senate Republicans other than Scott had not publicly responded by press time.

The Fed meets Tuesday and Wednesday with oil prices and inflation still elevated by the war with Iran, the kind of backdrop that historically argues against the rate cuts Trump has demanded. Powell's news conference Wednesday afternoon is the next fixed point on the calendar; the Banking Committee vote on Warsh could follow within days.