Global policymakers are voicing concern that repeated attacks on the Federal Reserve by US President Donald Trump pose risks to financial stability and inflation.
European Central Bank policymaker and Finnish Central Bank Governor Olli Rehn said Thursday that undermining Fed independence would have repercussions across financial markets and the global economy.
The criticism follows Trump’s public discontent with the Fed’s policy stance.
He has repeatedly targeted Chair Jerome Powell this year and earlier this week announced the dismissal of Governor Lisa Cook.
Such moves have heightened worries that the central bank could become entangled in political interference.
Risks of politicised monetary policy
Rehn stressed that Fed independence has been a cornerstone of US economic stability since the early 1980s.
He warned that political pressure to keep rates low could undermine that record, noting that the central bank has traditionally set policy based on economic data to keep inflation under control.
If that principle erodes, he said, the risk of an inflation surge becomes real.
The broader concern is that political leaders could push for looser monetary policy to secure short-term growth or electoral gains, regardless of long-term consequences.
Such interference, Rehn cautioned, would damage US institutional credibility and spill over into global markets, amplifying volatility.
Global Implications for markets and economies
Rehn emphasised that the fallout from undermining Fed independence would extend well beyond the United States.
Financial markets, already sensitive to signals from Washington, would likely face heightened uncertainty.
A loss of confidence in the Fed could trigger capital flight, raise borrowing costs, and fuel currency volatility.
The repercussions would filter through to the real economy in the form of disrupted investment flows, weaker consumer spending power, and waning trust in the dollar’s durability.
For economies with significant exposure to US markets, he warned, the spillover could mean weaker growth prospects and mounting inflationary pressures.
Europe’s position and spillover risk
Rehn argued that Europe had stronger institutions, less susceptible to overt political pressure, but admitted that the continent could not fully escape the repercussions.
The euro area has long been tied to events in the US by financial markets, hence any instability in the Fed would likely be felt across the Atlantic.
To reduce these risks, he said Europe needed to keep reinforcing faith in the euro as a major global safe-haven currency.
It would be important to avoid any question about the independence of the European Central Bank: that is essential for maintaining stability.
Rehn highlighted the current 2% inflation rate in the euro area, attributing it directly to monetary independence.
Dollar’s resilience and conditional risks
Despite current worries, the dollar’s position as the world’s primary reserve currency remains strong.
Under normal circumstances, Rehn suggested that the dollar would not fall sharply in value.
However, he warned that if the United States’ broader institutional foundations—including the rule of law, democratic norms, and civil liberties—are eroded, the currency’s long-standing status may face extraordinary difficulties.
Although unlikely, such a scenario would have far-reaching consequences for the global financial system, including hastening other countries’ efforts to diversify their reserves away from the dollar.
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