A former European Central Bank president warned that the Trump administration's attacks on the Federal Reserve's independence are jeopardizing the foundations of the global financial system. Central bank governors from multiple countries have issued a rare joint statement supporting the Fed, expressing concern that the move could trigger a structural rise in global inflation and undermine the dollar's credibility. Analysts point out that the high level of US debt and the unusually calm market create a dangerous contrast; if the central bank's independence is compromised, it could trigger a triple crisis: dollar depreciation, runaway inflation, and a collapse of debt chains.



A former European Central Bank president said, "US President Trump's attacks on the Federal Reserve have a serious impact on the global financial system."

Former Bank of France governor Jean-Claude Trichet said on Wednesday (January 14) that the Trump administration is trying to “change the game” by undermining the nearly 50-year-old consensus in developed economies on the independence of the Federal Reserve.

Federal Reserve Chairman Jerome Powell revealed on Sunday that the Justice Department has launched a criminal investigation into the $2.5 billion renovation project at the Fed headquarters. Powell called the investigation a political attack, aimed at retaliation for the Fed's refusal to yield to pressure from Trump to cut interest rates more quickly and significantly.

On Tuesday, the heads of major central bankers around the world—including Bank of England Governor Andrew Bailey and European Central Bank President Christine Lagarde—issued a joint statement defending Powell.

Trichet likened Powell's situation to the monetary policy decision-making methods of some weak emerging market countries, warning that "the situation is extremely serious." He stated, "A Federal Reserve reduced to the most subservient servant of the executive branch is not what the U.S. Constitution envisions. The Federal Reserve should be accountable to Congress, not to the executive branch."

Finnish central bank governor Olli Rehn stated that the Federal Reserve's independence is the "cornerstone" of financial and price stability. He warned that if the Fed's credibility is damaged, global inflation will experience a structural rise, and emphasized the systemic importance of the United States in the global economy.

"This will undoubtedly have a global ripple effect, and all parties, including those in Europe, must take this into account when making decisions in order to more broadly maintain price and economic stability," Rennes said on Wednesday.

Huge vulnerability

Trichet points out that the bipartisan consensus on “increasing spending” is a key factor contributing to economic and political fragility, as investors are increasingly concerned about financing the deficit and the huge debt-to-GDP ratio.

He stated, "What you're observing at the U.S. level applies more or less to the global economy as a whole. Our current situation is that, in both the public and private sectors, the ratio of outstanding debt to GDP is higher than... the level before the collapse of Lehman Brothers."

"The current market performance is too calm and is disproportionate to the potential risks."

He added, "The global economy is currently in an extremely fragile state, and we must take this into account. The turbulent relationship between the U.S. administration and the Federal Reserve is extremely worrying, which is undoubtedly one of the most concerning reasons."

Citigroup warned that the threat posed by populist governments to central bank independence may not be limited to the United States.

In a report released on Tuesday, the bank noted that as the weighted average maturity of UK government bonds and European government bonds continues to shorten, and fewer investors are willing to buy 30-year bonds, debt servicing costs are becoming more sensitive to policy rate decisions.

They added that this could lead to greater pressure from future populist governments to cut interest rates, writing: "While the independence of the European Central Bank and the Bank of England is currently unquestioned, such independence is not a given in the long run."

Analysis of the impact on the US dollar

The incident has transcended the realm of domestic political struggle in the United States, evolving into a challenge to the authority of the existing global monetary system. If the independence of the Federal Reserve continues to be undermined, it could trigger a triple crisis: erosion of the dollar's credibility → disruption of the global inflation mechanism → rupture of sovereign debt financing chains.

This event has severely damaged the credibility of the US dollar and is expected to exert downward pressure on the dollar in the medium to long term. During Thursday's early Asian trading session, the US dollar index fluctuated narrowly around 99.10.

The current "calm" in the market is more like the calm before a storm than a sign that the risks have subsided.



(US Dollar Index Daily Chart, Source: FX678)

At 9:43 AM Beijing time, the US dollar index is currently at 99.10.