Former European Central Bank President Jean-Claude Trichet stated in an interview that former US President Trump's persistent criticism of the Federal Reserve could have "serious consequences" for the global financial system. He argued this approach is undermining the consensus on central bank independence that has been established in developed economies over the past 50 years.
Trichet, who also served as the former governor of the Bank of France, indicated that the Trump administration is attempting to "change the rules of the game" by weakening central bank independence to influence monetary policy decisions. Last weekend, Federal Reserve Chair Jerome Powell disclosed that the US Department of Justice had launched a criminal investigation into a $2.5 billion renovation project at the Fed's headquarters.
Powell characterized this move as having clear political motivations, stemming from the Fed's refusal to cut interest rates more quickly and aggressively as demanded by Trump. This past Tuesday, several major global central bank chiefs jointly voiced their support for Powell, including Bank of England Governor Andrew Bailey and European Central Bank President Christine Lagarde.
Trichet compared Powell's situation to that seen in some emerging markets with weaker institutions, warning that the current "situation is extremely serious." He pointed out, "A Fed that becomes the most obedient servant of the executive branch does not correspond to what the US Constitution expects. The Fed depends on Congress, not the executive branch."
Bank of Finland Governor Olli Rehn also emphasized that central bank independence is the "cornerstone" of financial and price stability. He warned that if the Fed's credibility is damaged, it could trigger structural upside risks to global inflation. Given the systemic importance of the US in the global economy, the impact would spill over to other major economies, including Europe.
"This will undoubtedly have global implications, and we all must factor this into our own decision-making to maintain price stability and broader economic stability," Rehn stated. Trichet further noted that "high vulnerability" in the US fiscal and political spheres is intensifying.
He mentioned that a longstanding bipartisan consensus in the US has been to "continuously increase spending," which is making investors increasingly wary of financing the fiscal deficit and the high debt-to-GDP ratio. "The situation in the US also reflects, to some extent, the state of the global economy," Trichet said.
"Both public and private sector debt-to-GDP ratios are currently higher than they were before the collapse of Lehman Brothers. Markets appear excessively calm in the face of these risks," he added. He warned that if the Fed is forced to become the president's "most obedient servant," it would have an "extremely damaging impact" on global economic and financial stability.
"We are in a phase of high vulnerability for the global economy, which is why the breakdown in the relationship between the US executive branch and the Fed is so deeply concerning," Trichet remarked. Meanwhile, Citigroup (C.US) also noted in a recent report that the risk of populist governments attacking central bank independence could spread beyond the US.
As the weighted average maturity of UK gilts and European government bonds continues to shorten, and investor interest in long-term bonds like 30-year maturities declines, the interest cost of national debt is becoming increasingly sensitive to changes in policy rates. Citigroup believes this could increase the likelihood of populist governments pressuring central banks for interest rate cuts in the future.
The report warned that although the independence of the ECB and the Bank of England is not currently being questioned, "over the long term, this cannot be taken for granted."
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