ECB President Christine Lagarde warns Trump' attempts to undermine the Federal Reserve pose economic risks. Image: CNBC News.
(The Post News) – European Central Bank President Christine Lagarde has warned that President Donald Trump’s actions to bully the US Federal Reserve are a “very serious danger” to the US economy and the world economy too.
Speaking on a French radio station, Radio Classique, on Monday, Lagarde reiterated that the independence of the Fed is most vital to maintaining stability. She warned that any attempt by Trump to attempt to override monetary policy would destabilize markets and be damaging to confidence in the world’s largest economy.
“If US monetary policy were no longer autonomous and, instead, dependent on the whims of this or that person, then the effect on the stability of the American economy could, compared to the effect this would have across the globe, be quite disquieting,” Lagarde stated.
Trump’s Attacks on the Fed
Trump has been waging a fiercely contested campaign against Federal Reserve Chairman Jerome Powell since his re-entry into the presidency in January. He had blamed Powell for strangling economic growth by failing to cut interest rates deeply enough. The president has also tried to oust Federal Reserve Governor Lisa Cook, which created a fiercely contested legal battle.
Trump’s attorneys showed up in court to contend that Trump alerted her to the effort to oust her by a tweet. They asserted that the law mandates the ousting of a Fed governor on the grounds of “gross misconduct.” Cook, who was going to serve until 2038, protested the action, urging that the president “has no authority” to oust her without cause.
By trying to oust Powell and Cook, Trump is attempting to replace them with loyalists who would cut rates immediately. Economists warn this meddling would politicize the Fed and harm inflation.
Lagarde showed how Trump’s campaign of pressure can not just drain confidence in the United States but also elsewhere in the financial systems around the world. “The US Supreme Court has clearly indicated that a Fed governor can only be dismissed in the case of gross misconduct,” she said. “And you’d have to go quite far to be fired for gross misconduct.”
She added that Trump’s recent tariff policies, which a US appeals court declared mostly illegal on Friday, have already created a “further layer of uncertainty” for businesses and markets worldwide.
The alert comes as global investors react in disbelief to rising borrowing costs. US Treasury yields increased over the last few months, fueled by inflation fears, rising government debt, and political tensions against the Fed.
US unrest is not an exception. European and UK borrowing costs also increase. UK government bond yields reached their 30-year peak recently, and French debt yields shot up in alarm of a Paris politics crisis.
Any curtailment of the independence of the Fed will trigger a chain reaction throughout the world’s financial markets, pushing interest rates up and lowering economic growth in advanced economies, the economists warn.
Former British PM Liz Truss, who resigned after her economic plan’s market chaos in 2022, openly joined hands with Trump’s beef against the Fed. Economists, however, warn her about compromising central bank independence. French political risk was also noted by Lagarde as Prime Minister François Bayrou moves towards a likely defeat in an upcoming vote of confidence next week.
Political news and cases of political risk undoubtedly influence the economy,” she said. “Any risk of government collapse in any Eurozone country is a cause for concern.”
Lagarde dismissed rumors that France might be compelled to ask for the help of the International Monetary Fund (IMF). She emphasized French banks are solid. “The French banking system is very capitalized, better positioned than it was during the last great financial crisis, and well supervised,” she stated. “I do not believe that the banking system in itself is the origin of the risk today.”
The Federal Reserve regulates the global economy by controlling US interest rates and inflation. Central banks are best positioned above politics so as not to allow decisions to be influenced by economic reality rather than political opportunities of the day.
Trump’s demand for rate reductions below 1% would spur growth for a time but at the risk of starting inflation. The Fed’s existing rate of 4.25% to 4.5% has been the stance since last December, aimed at balancing growth with inflation.
Lagarde’s caution reflects widespread fear among economists: if the Fed gives in to political pressures, central banks across the world will end up losing their credibility, and there may be financial instability in much of the world.
Trump is still faced, for now, with legal and institutional limits on his ability to dominate the Fed. But the standoff already gave markets a scare, leaving doubts about the future of global monetary policy.
As Lagarde said, Federal Reserve independence is not only important for the US economy but also necessary to ensure stability throughout the entire global financial system.
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