Donald Trump’s attempt to influence the US Federal Reserve could pose a “very serious danger” for the world economy, the head of the European Central Bank has warned.
Christine Lagarde, the president of the ECB, said Trump undermining the independence of the world’s most powerful central bank would have an impact for the US and other countries.
Steps by the US president to remove the Fed chair, Jerome Powell, or the governor Lisa Cook would be a “very serious danger for the US economy and the world economy”, Lagarde told the French broadcaster Radio Classique.
“If US monetary policy were no longer independent and instead dependent on the dictates of this or that person, then I believe that the effect on the balance of the American economy could, as a result of the effects this would have around the world, be very worrying, because it is the largest economy in the world,” she said, according to remarks reported by Reuters.
Trump has repeatedly criticised Powell for not cutting interest rates and has threatened to fire him. He is also attempting to remove Cook, who is appealing against the decision in a case that could reach the US supreme court.
In court on Friday, lawyers for Cook argued that she could not be fired without the notice or “cause” required to remove a Fed governor. She learned of her attempted removal via a post on social media, they said.
Sacking Cook, whose term is not due to expire until 2038, would enable Trump to nominate a replacement. However, Cook has argued that the president has “no authority” to remove her.
Lagarde said it would be “very difficult” for Trump to take control of Fed decision-making on interest rates. “The US supreme court, which is largely respected in the country and therefore I hope will be respected by [Trump] as well, has clearly indicated that a Fed governor can only be dismissed in the case of gross misconduct.”
Trump received backing for his assault on the Fed last week from Liz Truss, the shortest-serving British prime minister in history, who was ousted after a meltdown in the financial markets.
Leading investors and economists have said political interference damages the credibility of central banks to keep inflation under control. US government borrowing costs have risen in recent months amid concern about the impact Trump’s tariff policies could have and questions about Fed independence.
Borrowing costs have also risen across other advanced economies. The rise is linked to the uncertainty in the US, alongside investor worries about elevated debt levels in several nations and the return of inflation after the Covid pandemic, and Russia’s war in Ukraine.
Long-term borrowing costs for the UK government have risen close to the highest levels in 30 years, while the yield – in effect the interest rate – on French government debt has also risen amid a political crisis for President Emmanuel Macron.
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Lagarde, who was France’s finance minister until 2011 before leaving to run the International Monetary Fund, said the risk of collapse facing the French government was a concern for the eurozone economy.
“Political developments and moments of political risk have an obvious impact on the economy,” she said.
Facing difficulty in getting his budget passed, the prime minister, François Bayrou, is expected to lose a confidence vote in the national assembly on 8 September after announcing a “back me or sack me” election last week.
The ECB president said the central bank was carefully monitoring developments in financial markets. However, she signalled that Paris was unlikely to need emergency support from the IMF, playing down a suggestion made by the country’s finance minister, Eric Lombard, late last month.
Lagarde said the French banking system was better placed now than it was during the 2008 financial crisis. “Countries request IMF intervention in circumstances of serious budgetary deficit or when a country cannot meet its financial obligations … I do not believe that the banking system itself is in any way the source of the current risk – but markets, in all circumstances of this nature, assess the risk.”
