Make the central bank listen! – This is not just Trump's wish

Trump's pressure on the Federal Reserve to cut interest rates and attempts to reshape the central bank's leadership are causing a chain of concerns among global central banks.

On August 25, media reports indicated that during the Federal Reserve's annual symposium held in Jackson Hole, Wyoming, central bank officials from around the world expressed worries that if the most influential central bank in the world succumbs to political pressure, it would set a dangerous precedent for political interference in other countries.

Trump has publicly pressured Federal Reserve Chairman Jerome Powell to resign and attempted to oust Governor Lisa Cook, actions that have drawn significant attention from the international central banking community. European Central Bank policymaker Olli Rehn stated:

"Attacks on the Federal Reserve for political motives will have a psychological impact on other parts of the world, including Europe."

Reports noted that Trump's pressure on the Federal Reserve is not an isolated case, as central banks in countries like Japan and Latvia are facing similar political pressures.

Analysts pointed out that if the independence of the Federal Reserve is compromised, it could trigger significant turmoil in financial markets, with investors demanding a higher risk premium for holding U.S. Treasuries and reassessing the status of U.S. Treasuries as the lifeblood of the global financial system. Central banks around the world have begun preparing for such shocks, warning banks to pay attention to their dollar exposure.

Global Central Bank Officials Support Powell

Reports indicated that during the Jackson Hole meeting, the international central banking community demonstrated strong support for the independence of the Federal Reserve. When Powell took the stage to speak, attendees stood up and applauded in support.

According to a dozen central bank officials interviewed by the media, the scenario where the Federal Reserve loses its independence and weakens its ability to combat inflation is seen as a direct threat to the status of global central banks and economic stability. Joachim Nagel, President of the Deutsche Bundesbank and member of the European Central Bank's Governing Council, stated:

"This reminds us that independence should not be taken for granted. We must fulfill our responsibilities and make it clear that independence is a necessary condition for price stability."

Olli Rehn of the European Central Bank emphasized that he and his colleagues from Finland support Powell's stance, even though Powell has hinted at a possible interest rate cut in September.

Reports indicated that central bank officials are concerned that if the Federal Reserve succumbs to political pressure, it will set a dangerous precedent for politicians to attack the independence of monetary policy from Europe to Japan.

Political Interference in Central Banks Is Not Unique to the U.S.

Trump's pressure on the Federal Reserve is not an isolated case, as many central banks are facing similar political pressures.

Martins Kazaks, Governor of the Bank of Latvia, faced criticism from domestic politicians during his controversial reappointment process for not aligning with the government's wishes. Slovenia has not had a central bank governor since January due to party disputes.

In Japan, the late Prime Minister Shinzo Abe harshly criticized then-Governor Masaaki Shirakawa for his inadequacies in combating deflation and personally selected Haruhiko Kuroda to succeed him in 2013, just weeks before Shirakawa's term ended.

Kuroda subsequently implemented a massive asset purchase program, helping to devalue the yen and reignite growth, but this raised concerns among traditional central bank officials as it made the Bank of Japan the government's primary creditor Even the European Central Bank, protected by EU treaties and independent of the 20 eurozone governments, has to work hard to prove its independence.

The bank has been accused of funding governments due to its large-scale bond-buying program initiated ten years ago to avoid deflation, and it has faced multiple court challenges seeking to stop these purchases. Left and right-wing parties in Italy, Germany, and France regularly criticize the European Central Bank.

The independence of the Federal Reserve is compromised, which could trigger significant turmoil

Currently, financial markets have not shown deep concern about the independence of the Federal Reserve. The U.S. stock market is rising strongly, and there has been no surge in Treasury yields or an increase in inflation expectations that would indicate a questioning of the Fed's credibility.

However, if the independence of the Federal Reserve is indeed compromised, the consequences could be severe. Central banks around the world have begun preparing for potential shocks, advising regulatory banks to pay attention to dollar exposure. Investors may demand a higher risk premium for holding U.S. Treasuries and reassess the core position of U.S. Treasuries in the global financial system.

Maury Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, warned:

"Taking over the Federal Reserve would set a very bad example for other governments. When you see this happening in the United States, which is considered a bastion of institutional checks and balances and the rule of law, how can you not conclude that other countries are more likely to become targets?"

A source familiar with the Bank of Japan's thinking stated, " It's as if Trump learned something from Abe."

Analysts point out that Trump's actions may encourage governments around the world, especially those with populist tendencies, to exert control over their central banks. This could lay the groundwork for rising global inflation and increased market volatility