President Donald Trump’s attacks on the Federal Reserve are having “serious” consequences for the global financial system, a former European Central Bank governor told CNBC.
Jean-Claude Trichet, who is also a former governor of the Bank of France, told CNBC’s “Squawk Box Europe” on Wednesday that the Trump administration is “trying to change the game” by upending the long-standing consensus on central bank independence that has prevailed in developed economies for nearly 50 years.
On Sunday, Fed Chairman Jerome Powell revealed that the Justice Department had opened a criminal investigation into the central bank’s $2.5 billion headquarters renovation. Powell said the investigation was a political attack in response to the Fed’s refusal to give in to pressure from Trump to lower interest rates further and faster.
On Tuesday, global central bank leaders – including Andrew Bailey of the Bank of England and European Central Bank President Christine Lagarde – issued a joint statement defending Powell.
Trichet compared Powell’s treatment to the way monetary policy is made in some emerging markets with weak institutions, warning that the “situation is extremely serious.”
“A Federal Reserve that is the most obedient servant of the executive branch is not what is expected of the U.S. Constitution. The Fed reports to Congress, not the executive branch,” he said.
Bank of Finland Governor Olli Rehn said central bank independence was a “cornerstone” of financial and price stability. He warned of a structural rise in global inflation if the Fed’s credibility was undermined, emphasizing the systemic importance of the United States in the global economy.
“It would certainly have global ramifications and of course all of us, including Europe, would have to take that into account in our own decisions to safeguard price stability and economic stability more broadly,” Rehn told CNBC’s “Squawk Box Europe” on Wednesday.
“Great vulnerability”
Trichet pointed to the “bipartisan consensus” in the United States to “spend more and more” as a key factor in economic and political vulnerability, as investors become wary of financing gaps and huge debt-to-GDP ratios.
“What you see at the US level is also true, more or less, at the level of the global economy as a whole. We are in a situation where the outstanding debt as a proportion of GDP, public and private, is currently higher… [than] just before Lehman Brothers went bankrupt,” he said.
“The market is far too calm given the risks that exist.”
Trichet said that if the Fed were brought to heel as the president’s “most obedient servant,” it could be “very detrimental to the overall stability of the global economy and the finances of the global economy.”
He added: “We are in a situation of great vulnerability in the global economy. We also have to take that into account. This is one of the reasons why the destabilization of the relationship between the executive branch and the Federal Reserve in the United States… is extremely worrying, extremely worrying without a doubt.”
Citi warned that risks to central bank independence from populist governments could also extend beyond the United States.
As the weighted average maturity of government bonds and European government bonds continues to shorten, and fewer investors want to buy longer-term securities at 30 years, debt service costs have become more sensitive to policy rate decisions, they wrote in a Tuesday note.
This, in turn, could lead to greater pressure from future populist governments to lower rates, they added, writing: “Even if the independence of the ECB and BoE is not currently in question, this cannot be taken for granted in the long term.” »
