US Attorney for the District of Columbia Jeanine Pirro, an appointee of Republican President Donald Trump whose office is spearheading the investigation, promised to appeal Chief US District Judge James Boasberg's decision.
Powell, a frequent target of Trump's ire, disclosed the investigation on January 11, calling it a threat to the Fed's political independence.
The Fed's Board of Governors made a motion to quash the subpoenas, which sought information about the renovations of two historic buildings that have led to cost overruns as well as Powell's July 2025 testimony before the Senate Banking Committee.
Powell has called the probe a pretext for Trump to pressure the Fed into cutting interest rates. The judge agreed, saying a "mountain of evidence" suggests the investigation was to pressure the Fed chair to lower rates or resign.
"The government has produced essentially zero evidence to suspect Chair Powell of a crime. Indeed, its justifications are so thin and unsubstantiated that the Court can only conclude that they are pre-textual," Boasberg wrote.
The ruling for now will make it difficult for the Justice Department to proceed in its investigation of Powell. Prosecutors said they are examining whether Powell made false statements to Congress and committed fraud, according to court documents made public on Friday.
Boasberg concluded the subpoenas were issued for an improper purpose and as a result were not legally valid.
"The government has offered no evidence whatsoever that Powell committed any crime other than displeasing the president," the judge wrote.
"The government might as well investigate him for mail fraud because someone once saw him send a letter."
Pirro told a news conference the judge "has neutered the grand jury's ability to investigate crime".
"As a result, Jerome Powell today is now bathed in immunity," Pirro told reporters, adding that her suspicion that a law was violated is enough reason to pursue cases.
A Fed spokesperson declined to comment.
Trump has heaped pressure on the central bank to cut interest rates and has lashed out at Powell for not doing so more quickly.
Friday's ruling was the latest court setback for the Trump Justice Department as it pursues investigations into critics and antagonists of the president.
A judge in November dismissed indictments against former FBI chief James Comey and New York state Attorney-General Letitia James, who each previously led investigations into Trump.
Boasberg in his ruling wrote that being an adversary to Trump "has become risky in recent years".
