[HELSINKI] President Donald Trump’s escalating attacks on the US Federal Reserve could have substantial and global knock-on effects on the financial markets and the real economy, ECB policymaker Olli Rehn said in a speech on Thursday (Aug 28).
Uncertainty surrounding the world’s most important monetary authority, the Federal Reserve, has risen this year as Trump repeatedly criticised its chair Jerome Powell and on Monday announced he was firing one of its governors, Lisa Cook.
“President Trump has, in fact, has exerted strong pressure on the US Federal Reserve to cut interest rates for quite some time,” Finland’s central bank governor said.
The Fed’s independence has remained an inviolable principle since the beginning of the 1980s, he added.
“Now, however, this principle is wobbling badly. This could have substantial, global knock-on effects on both the financial markets and the real economy,” Rehn said.
He said Europeans should take action to boost global confidence in the euro as a safe currency in order to avoid a similar deterioration of central bank autonomy in Europe.
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“It’s no mere coincidence that euro area inflation is now at the 2 per cent target – it is indeed connected to the central bank’s independent decision-making,” he said.
The US dollar’s global hegemony as a reserve currency has proven resilient, and therefore Rehn said he considered its rapid weakening unlikely.
“I say this, however, with one important caveat: if the US dollar’s institutional foundations were to crumble – I am referring to the principles of the rule of law and democracy, as well as civil liberties – we could find ourselves in a different situation.”
While the euro area’s growth has proved more resilient than expected, Rehn said inflation was set to slow below the 2 per cent target in the short term, due to cheaper energy, a stronger euro, and a slowdown in services inflation.
“In the ECB’s Governing Council, we are closely monitoring the economic situation and stand ready to act if needed,” Rehn said. REUTERS
