As policymakers at the US and European central banks prepare for their landmark September interest rate decisions, a thought-provoking historical event should be considered. Forty-five and a half years ago, a newly appointed central bank governor grappled with a dilemma in monetary governance. His refusal to cut interest rates incurred the wrath of his former benefactor, now the head of state. The transatlantic financial crisis swept in, forcing the new central bank governor to implement monetary tightening, a move that exacerbated the economic crisis and ultimately ousted his former mentor from politics. On one side are Donald Trump and newly appointed Federal Reserve Chairman Kevin Warsh; on the other are West German Chancellor Helmut Schmidt and Bundesbank President Karl Otto Perl. The historical contrast between these two groups is clear. In 1981-1982, then-Federal Reserve Chairman Paul Volcker's monetary tightening, initiated in the late 1970s, unleashed shockwaves across the globe. At that time, Perl had served as State Secretary to the Treasury under Schmidt's tenure as Finance Minister. In 1977, Schmidt promoted this confidant to Vice President of the Bundesbank; in January 1980, Perl officially became President. Faced with the sharp depreciation of the Deutsche Mark against the dollar, Perl, with the support of his resolute deputy Helmut Schlesinger, had no choice but to maintain an extremely tight monetary environment. Even with public pressure from Schmidt and French Prime Minister Raymond Barr, he remained unmoved. Now, in 2026, despite Europe's relatively weak geopolitical position, the cause-and-effect relationship seems to have reversed. The European Central Bank's Governing Council will meet in Berlin on September 9-10. Driven by inflation from the ongoing US-Israel-Iran conflict, the market expects the ECB to raise its deposit rate by 0.25 percentage points from 2.25%. On September 15-16, the Federal Open Market Committee (FOMC) will meet in Washington to discuss whether to raise the federal funds rate from the current 3.50% to a range of 3.75%. Following Warsh's shift in stance at the Jackson Hole symposium, the probability of a Fed rate hike is increasing. Trump is unlikely to welcome this outcome. The spillover effects of the ECB on the Fed: European actions are naturally not the core driver of whether the Fed will raise rates. However, if the world's second-largest central bank takes the lead in making this well-communicated but politically costly tightening decision, it will at least have a psychological impact on some members of the FOMC. As the decision to raise interest rates is made, the two core Eurozone countries, Germany and France, are mired in political turmoil. German Chancellor Friedrich Merz faces the tough test of the September 6 local elections; French President Emmanuel Macron is about to step down, and polls show that populist candidates from both the left and right wings are leading in the French presidential election in April 2027. Trump has consistently criticized former Federal Reserve Chairman Jerome Powell (currently still a member of the Federal Reserve Board of Governors) for refusing to cut interest rates and for not cooperating with the president's demands to lower the cost of government debt. (Trump deliberately avoids the obvious reality: deliberately allowing inflation to rise will actually push up, rather than lower, long-term borrowing costs). In May 2026, Trump appoints Warsh as the Federal Reserve Chairman. Warsh served on the Federal Reserve Board of Governors from 2006 to 2011, and Trump appointed him partly because he believed the new chairman would be more inclined to monetary easing than his predecessor. However, Warsh reiterated last month that the Federal Reserve would firmly combat inflation, a statement that clearly will not be approved by the White House. Reports suggest that Warsh will "do what he has to do." This implies that if the Federal Reserve chooses to raise interest rates on September 15th, Trump's reaction might be more restrained compared to the Powell era. However, for the president, who faces a series of credibility tests ahead of the November midterm elections, a rate hike is still bad news. A Lesson from the Federal Reserve Bank's History (by Henry II) It is a common phenomenon for political appointees to part ways with their former appointees after taking the helm of a central bank. Successive Federal Reserve Bank presidents have varied personalities, yet all have undergone various pressures and tests. This commitment to independence has also been passed on to the European Central Bank. To describe this strong institutional independence, Federal Reserve Bank insiders, with a touch of historical reflection, cited the story of King Henry II of England. This analogy was first proposed in 1992 by Otmar Issing, then a Federal Reserve Bank economics director, who moved to the European Central Bank in 1998 to assume the same position. In 1162, Thomas Becket, Lord Chancellor of Henry II, was appointed Archbishop of Canterbury, and subsequently became an adversary of the king. Becket was assassinated in 1170, a tragedy depicted in T.S. Eliot's play *Murder in the Cathedral*. This phenomenon—where officials initially promoted by those in power, upon taking charge of the central bank, adhere to monetary tightening principles, contradicting the stance of their promoters—is now known in academia as the "Becket effect." This effect was vividly demonstrated in 1981-1982. Prior to this, Germany had already raised interest rates significantly; facing a continuously weakening Mark, the Bundesbank, led by Perl, a figure handpicked by Schmidt, suspended conventional lending facilities to commercial banks, pushing money market interest rates to 30% in 1981. The Political Consequences of 1981 The Bundesbank's monetary tightening had significant political consequences. In the May 1981 French presidential election, Mitterrand won. On the eve of the election, French Prime Minister Raymond Barr wrote to Schmidt, urgently requesting the Federal Bank to lower interest rates. "I believe that if interest rates could fall to a more moderate level, it would greatly help the German economic recovery and boost other countries," Barr stated. Schmidt seized the opportunity, forwarding a copy of Barr's letter to the Federal Bank in Frankfurt, thereby pressuring Pearl and Schlesinger. After consulting with the Federal Bank's board, Pearl and Schlesinger replied to Schmidt, directly rejecting the request for a rate cut. Schmidt himself, a key figure in pushing for the US credit crunch in his early years, ultimately became a victim of austerity policies. In the final weeks of his term, Schmidt relentlessly but futilely lobbied the Federal Bank to ease credit. A previously unpublished historical record states that Pearl and Schlesinger secretly met with Schmidt at his private residence in Langenhorn, a suburb of Hamburg. Schmidt pleaded with the two central bank officials to cut interest rates, but they were only willing to make technical adjustments, such as lowering the minimum reserve requirement ratio for banks—far from what the troubled prime minister wanted. The decisive debate in the Federal Reserve in October 1982 definitively ended the Schmidt administration; Parliament passed a vote of no confidence, and Helmut Kohl of the Christian Democratic Union came to power. During the debate, Schmidt frankly admitted that his once harmonious relationship with the central bank had completely broken down. He urged the Federal Reserve to "make a decisive contribution to lowering interest rates to stimulate investment," and warned, "I must be wary of the consequences of deflation!" The Federal Reserve did not substantially lower interest rates until the summer of 1983, after Schmidt had already stepped down. When will the Federal Reserve begin cutting interest rates? And when that happens, how precarious will Trump's political situation become? In the coming months, these are two intriguing questions facing Europe and the United States.