Lagarde warns: The independence of the Federal Reserve is crucial to the global economy, and the turmoil in French politics is concerning

According to the Zhitong Finance APP, European Central Bank President Christine Lagarde stated on Monday that the loss of independence by the Federal Reserve would pose a "serious threat" to the global economy. Speaking about Europe, Lagarde mentioned that the European Central Bank has achieved price stability and will take all necessary measures to control inflation in the Eurozone. She also issued a warning regarding the crisis of the French government.

Federal Reserve's Independence Under Test

In an interview on Monday, Lagarde stated that U.S. President Donald Trump would find it "very difficult" to control the Federal Reserve. She also pointed out that some legal precedents limit Trump's ability to dismiss Federal Reserve governors.

Lagarde said, "If he really succeeds, I think it would pose a very serious threat to the U.S. economy and the global economy. Monetary policy clearly affects the U.S. in maintaining price stability and ensuring optimal employment conditions."

Lagarde indicated that if the Federal Reserve loses its independence, "I think the stability of the U.S. economy will be concerning, and since the U.S. is the largest economy in the world, the impact will also ripple globally, which would be very unsettling."

Trump has launched unprecedented and fierce attacks on the Federal Reserve, demanding that it lower interest rates. He has not only repeatedly criticized Federal Reserve Chairman Jerome Powell but also decided to dismiss Federal Reserve Governor Lisa Cook, who is currently contesting this dismissal in court.

Inflation in the Eurozone Under Control

When discussing Europe, Lagarde stated that inflation has reached the target level of 2%, "We will continue to take necessary measures to ensure that inflation is controlled and prices remain stable."

Lagarde made these remarks as the market awaits the Eurozone's August CPI data to be released on Tuesday. Economists predict that the inflation rate will be 2%, in line with the European Central Bank's target.

The European Central Bank is not worried about inflation in Europe.

The market generally expects that the European Central Bank will keep interest rates unchanged at its meeting in less than two weeks, as many decision-makers have indicated that they are satisfied with the current 2% interest rate level. At the July meeting, most decision-makers believed that inflation risks were "broadly balanced" and considered the European economy to be "resilient," despite facing adverse factors such as U.S. tariffs and the Russia-Ukraine war.

Although economists still expect the European Central Bank to cut interest rates in December, investors remain cautious about this.

When discussing growth prospects, Lagarde emphasized that trade between the EU and the U.S. has "significantly reduced" uncertainty.

Political Turmoil in France

Lagarde warned that the collapse of any government in the Eurozone is concerning, as the Prime Minister of her home country, France, seems likely to be dismissed in a confidence vote next week.

Due to the opposition's refusal to support Prime Minister François Bayrou's plans for significant spending cuts and tax increases, the Paris government will be forced to step down on September 8.

Lagarde stated on Monday, "The risk of governments in all Eurozone countries collapsing is concerning." In response to questions about France, she added, "The market is assessing the risks, and we have seen an increase in French risks in recent days." In the context of a severely divided parliament, France's budget deficit issue has once again raised concerns among investors. Last week, French bonds faced a sell-off, causing borrowing costs for France relative to Germany to rise to their highest level since January.

Political turmoil drives up the risk premium on French bonds

Christine Lagarde, former French Minister of Finance, stated that France is a "respected" borrower but has become associated with a higher risk premium.

She said, "I am very concerned about the spreads. The additional cost of French bonds has risen, slightly below that of Italy, whereas a few quarters ago, this was not the case."

Lagarde emphasized that addressing the debt issue is crucial for all countries, but she was reluctant to comment on the political means to achieve this goal.

She stated, "Discipline in public finances is necessary to send the signal that the government aims for sustainable debt levels, which can establish sufficient credibility in financial markets to support funding for the nation, local governments, and the overall fiscal operations of the country."