Fed crisis, central banks are "sniffing" danger - Trump's pressure on the Federal Reserve threatens the global banking system
The independence of the Federal Reserve is being questioned due to political interference by US President Donald Trump. The pressure on Fed leaders has raised concerns about the potential impact on global economic stability.
In a meeting among themselves, central bankers from around the world have begun to express concerns that the political storm surrounding the United States Federal Reserve could spread to include them as well.
US President Donald Trump has stepped up his efforts to pressure the Fed, demanding lower interest rates and trying to bring it into line with his policies. He has expressed dissatisfaction with the legal protections that provide independence to Fed leaders and the long terms they enjoy, designed to outlast the term of any president. Trump has publicly called for the resignation of Chairman Jerome Powell and is also trying to remove several members of the board of governors.
If the world’s most powerful central bank were to succumb to such political pressure, it would set a very dangerous precedent. Such a development could inspire politicians even in countries like Europe or Japan, where until now there has been a strong consensus on maintaining the independence of central banks from politics. “Politically motivated attacks on the Fed have a spiritual impact on the rest of the world, including Europe,” said a European Central Bank official and a representative from Finland.
Discussions between central bankers from different countries during the meeting highlighted that a loss of the Fed's independence to fight inflation would be seen as a direct threat to both their position and global economic stability in general. Such a development would cause major shocks in financial markets. Investors would seek higher yields to buy US government bonds and could call into question their security as the basis of the global financial system.
Central banks around the world have begun to brace for the potential consequences, warning their headquarters to carefully monitor their exposure to the U.S. dollar. If the Fed were to cave in to political pressure, it would mark the end of an era of relative price stability that has lasted since at least the 1980s. Since then, more and more central banks have followed the Federal Reserve model, which implies political independence and a clear focus on price stability, as well as keeping inflation around 2%.
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