President Donald Trump’s attacks on the Federal Reserve are having a “significant” impact on the global financial system, the former head of the European Central Bank told CNBC.
Jean-Claude Trichet, also a former governor of the Banque de 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 existed in developed countries for about 50 years.
On Sunday, Federal Reserve Chairman Jerome Powell announced that the Justice Department has opened a criminal investigation into the $2.5 billion renovation of the central bank’s headquarters. Chairman Powell said the investigation was a political attack on the Fed, which has not bowed to pressure from President Trump to cut rates further.
On Tuesday, the world’s central bank leaders, including Bank of England’s Andrew Bailey and European Central Bank President Christine Lagarde, issued a joint statement defending Powell.
Trichet compared Powell’s treatment to monetary policy in some emerging markets with weak institutions, warning that “the situation is extremely serious.”
“The Federal Reserve, the most obedient servant of the executive branch, is not what is expected of us under the U.S. Constitution. The Fed is dependent on Congress, not the executive branch,” he said.
Bank of Finland Governor Olli Rehn said central bank independence was “the cornerstone” of financial and price stability. He warned that global inflation would structurally rise if the Fed’s credibility was undermined, and emphasized the systemic importance of the United States in the global economy.
“It definitely has a global impact, and of course all of us, including in Europe, will need to take that into account in our decisions to protect price stability and economic stability more broadly,” Lane told CNBC’s “Squawk Box Europe” on Wednesday.
“Big vulnerability”
Trichet highlighted the “bipartisan consensus” in the United States to “spend more and more” as a key cause of economic and political fragility as investors grow wary of budget deficits and high debt-to-GDP ratios.
“What we observed at the U.S. level is more or less true at the level of the global economy as a whole. We are now in a situation where public and private debt as a percentage of GDP is higher than it was just before the collapse of Lehman Brothers,” he said.
“The market is too calm given the risks that are out there.”
Mr. Trichet said that if the Fed were to assume power as the president’s “most obedient servant,” it “could have a very negative impact on the overall stability of the world economy and on the finances of the world economy.”
He added: “We are in a situation of great vulnerability for the global economy, and that has to be taken into account as well. This is one of the reasons for the destabilization of the relationship between the U.S. executive branch and the Federal Reserve…It’s very troubling and certainly very troubling.”
Citi warned that risks to central bank independence from populist governments could extend beyond the US
Debt servicing costs are becoming more sensitive to policy rate decisions as the weighted average maturity of government and European government bonds continues to shrink, with fewer investors willing to buy longer-term 30-year bonds, they said in a note on Tuesday.
This could lead to further pressure from a future populist government to lower interest rates, he said, adding: “Although the independence of the ECB and the BoE is not in question at the moment, this cannot be taken for granted in the long term.”
