The criminal investigation by the United States Department of Justice into Federal Reserve Chair Jerome Powell sets a dangerous precedent that threatens to weaken a key US institution vital for the stability of the domestic and global financial markets and the dollar, experts and politicians warn.

The DOJ's inquiry will probe the central bank's renovation of its Washington headquarters and whether or not Powell made misleading statements to Congress about the work's cost, which is over budget and has ballooned to $2.5 billion.

However, the investigation, which President Donald Trump said he did not know about, is highly unusual for a sitting chair and could also diminish the central bank's autonomy, warned former Fed chair Janet Yellen.

"The fact that he (Trump) is willing to go that far to intimidate a Fed official suggests he's going to stop at nothing to get his way with respect to Fed policy," Yellen told The New York Times.

"If you can bring charges for no reason whatsoever against your enemies, we're no longer living in a society governed by the rule of law."

She joined with every living former Fed chair to issue a statement to criticize the DOJ's criminal investigation against Powell as an attack on the bank's independence.

Powell also hit back in a rare two-minute video released on Sunday after the bank was served with grand jury subpoenas on Friday. He linked the probe to pressure over interest rate policy.

Economists are closely assessing the latest twists and turns between the DOJ, Trump and Powell, as they will not only have far-reaching implications for the Fed as a vital, independent structure but also for global investors in the dollar.

In July, the Fed analyzed the effects of the dollar, saying, "For most of the last century, the preeminent role of the US dollar in the global economy has been supported by the size and strength of the US economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law."

However, Trump has made efforts to get Powell to cut rates, admonishing him as a "numbskull", a "stubborn mule" and "dumb".

Slower basis

The chair, who has held his role for eight years and was appointed by Trump in his first term, has cut interest rates on a slower basis than Trump would have liked. Powell had kept quiet until now, but was forced to respond on Sunday.

Under his tenure, the Fed's current target was 3.5 percent to 3.75 percent. Trump has been pushing for rates as low as 1 percent.

Congress is the architect behind the Fed's independence as it sought to ensure that it could perform its core mission with careful, neutral analysis and not be influenced at the behest of any president.

In another bid to take control of the bank, Trump had moved to fire board member Lisa Cook, who was appointed by former president Joe Biden's administration.

Trump used allegations of mortgage fraud against Cook but she challenged it. The Supreme Court will rule on Cook's case on Jan 21.

Trump is set to pick a new governor of the Federal Reserve Board after Adriana Kugler stepped down in August and will also select Powell's replacement for chair.

A chorus of Republicans have condemned the DOJ investigation into Powell.

Axios reported that Treasury Secretary Scott Bessent told Trump on Sunday that the probe "made a mess" and could affect financial markets.

Senator Thom Tillis, a member of the banking committee, said he would "oppose the confirmation of any nominee for the Fed including the upcoming Fed chair vacancy until this legal matter is fully resolved".