Trump’s war on Fed poses threat to financial stability: Trichet
President Donald Trump’s attacks on the Federal Reserve have “grave” ramifications for the global financial system, a former European Central Bank governor has told CNBC.
Jean-Claude Trichet, who is also a former governor of the Bank of France, told CNBC’s “Squawk Box Europe” on Wednesday that the Trump administration is “trying to change the game” by upending the long-held consensus of central bank independence that has held in developed economies for almost 50 years.
On Sunday, Fed chair Jerome Powell revealed the Department of Justice had launched a criminal investigation into the $2.5 billion renovation of the central bank’s headquarters. Powell said the probe was a political attack in response to the Fed’s refusal to bow to pressure from Trump to lower interest rates further and faster.
On Tuesday, global central bank heads — including the Bank of England’s Andrew Bailey and European Central Bank President Christine Lagarde — issued a joint statement defending Powell.
Trichet compared Powell’s treatment to how monetary policy is made in certain emerging markets with weak institutions, warning that the “situation is extremely grave.”
“A Federal Reserve that is the most obedient servant of the executive branch is not what is expected in the U.S. Constitution. The Fed depends on Congress, not on the executive branch,” he said.
Bank of Finland governor Olli Rehn said central bank independence is a “cornerstone” of financial and price stability. He warned of a structural rise in global inflation if the Fed’s credibility is undermined, highlighting the systemic importance of the U.S. in the world’s economy.
“That would certainly have global ramifications and of course all of us, including Europe, would have to take that into account in our own decisions to safeguard price stability and economic stability more broadly,” Rehn told CNBC’s “Squawk Box Europe” on Wednesday.
‘Great vulnerability’
Trichet highlighted the “bipartisan consensus” in the U.S. to “spend more and more” as a key contributor to economic and political vulnerability, as investors grow wary of financing deficits and huge debt-to-GDP ratios.
“What you observe at the level of the U.S. is also true, more or less, at the level of the entire global economy. We are in a situation where the debt outstanding as a proportion of GDP, public and private, is higher at the moment… [than] just before the collapse of Lehman Brothers,” he said.
“The market is way too calm given the risks that exist out there.”
Trichet said that, if the Fed were brought to heel as the “most obedient servant” of the president, it could be “very damaging for the entire stability of the global economy and the finance of the global economy.”
He added: “We are in a situation of great vulnerability of the global economy. We have also to take that into account. It is one of the reasons why destabilization of the relationship between the executive branch and the Federal Reserve in the U.S.… is extremely worrying, extremely…
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