The head of the European Central Bank has warned that if President Donald Trump were to undermine the independence of the US Federal Reserve, it would represent a “very serious danger” to the global economy.
Christine Lagarde said if the Fed was forced to respond to political diktats, it would have a “very worrying” impact on economic stability in the US, and therefore in the rest of the world as well.
Since coming to office, Trump has launched repeated attacks on the Federal Reserve’s chair, Jerome Powell. Last month, he attempted to fire one of its governors, Lisa Cook.
But Lagarde emphasised that it would be “difficult” in practice for the president to exert his will.
The Federal Reserve is the central bank of the United States. Its main job is to promote employment and keep prices stable. With these goals in mind, it sets interest rate policy – and it is meant to be independent of the US government.
However, its decisions have frequently attracted the ire of President Trump, both during his first term and since he returned to power in January.
He has made it clear on numerous occasions that he would like to see big cuts in US interest rates, in order to boost economic growth and lower the government’s own borrowing costs.
The Federal Reserve’s current target for its main interest rate is 4.25% to 4.5%. Trump wants that reduced to less than 1%. However, the Fed has left rates on hold since December last year amid lingering concerns about US inflation. A cut is widely expected later this month – but is highly unlikely to be large enough to mollify the president.
The result has been a concerted attack by Trump on the Fed’s leadership.
During an interview with the French radio station Radio Classique, Lagarde was asked what would happen if Trump were to seize control of US interest rate policy.
The head of the ECB replied: “I think it would it would be a very serious danger for the US economy and the global economy.”
She added: “If that policy wasn’t independent any more, if it was dependent on political diktats from one person or another, then the balance of the US economy – and consequently the impacts that has on the world as a whole, because it is the world’s largest economy, would be very worrying”.
However, she cautioned that it would be difficult in practice for President Trump to take control.
The US Supreme Court, she pointed out, had already said a Fed governor could only be dismissed if they were guilty of gross misconduct.
With the Federal Reserve’s interest rate-setting committee consisting of seven governors, plus presidents of regional Reserve banks, it would be difficult in practice for Trump to engineer a majority, she suggested.
Although the Powell was appointed by the president during his first term, the two have rarely seen eye to eye. In July, Trump described Powell as a “numbskull” who prevented people in the US from being able to buy houses by keeping rates too high.
Last month, he attempted to fire Cook, one of the Federal Reserve’s seven governors, claiming there was reason to believe she had made false statements on her mortgage. The move, which her lawyers said lacked any factual or legal basis, has been challenged in court.
