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President Donald Trump had accused Powell of improper cost overruns in renovating the Fed's building.
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US Attorney Jeanine Pirro said instead there would be an internal investigation led by the central bank's inspector general.
President Donald Trump has said the cost of the Fed's building renovations were too high, as part of a long-standing feud with Powell.
Powell's term is nearing its end and the US Senate is considering Trump's nominee for his replacement, Kevin Warsh. A key Republican, Thom Tillis, has withheld his support for Warsh unless the Trump administration would drop its investigation into Powell.
"American taxpayers deserve answers about the Federal Reserve's fiscal mismanagement, and the Office of the Inspector General's more powerful authorities best position it to get to the bottom of the matter," said White House spokesman Kush Desai in a statement.
"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."
In her post on X, Pirro said she would not "hesitate to restart a criminal investigation should the facts warrant doing so".
The inspector general's office said it was "actively working to complete our review, and look forward to making the results available to the public and Congress upon completion", declining to comment on a timeline.
July 2025: Watch Trump and Powell's awkward exchangeTrump called for the Fed to lower interest rates after returning to office last year, and then began floating the idea of firing Powell - a step some said could be illegal.
Amid months of attacks, he branded Powell a "knucklehead" and claimed he was "doing a lousy job" after his repeated calls for rate cuts were ignored.
Last summer, Trump criticised the ballooning costs of the renovations, arguing it will cost $3.1bn (£2.3bn), much higher than the Fed's $2.5bn forecast. The Fed has said the renovations will re
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