Fed's loss of independence would push up inflation, threaten stability, ECB's Rehn says

• Loss of Fed independence could lead to a 'structural rise of inflation' according to Rehn
• Threats to central bank independence may undermine credibility of financial markets and bond markets
• Rehn is currently running to become the ECB's next vice president while serving as Finnish central bank Governor

Summary

Finnish central bank Governor Olli Rehn warned on January 14 that any erosion of U.S. Federal Reserve independence could trigger structural inflation increases and potentially threaten financial stability. Speaking to CNBC, Rehn, who is campaigning to become the European Central Bank's next vice president, expressed "full solidarity" with the Fed amid apparent concerns about its autonomy.

Key Points:

Rehn emphasized that undermining Fed independence would likely result in a "structural rise of inflation" and could damage credibility in financial and bond markets. He stressed the critical importance of maintaining monetary independence for U.S. bond market health and overall financial stability.

Market Implications:

The comments highlight growing European concern about potential political pressure on the Federal Reserve. Any compromise to central bank independence is viewed as a significant risk factor that could:

• Elevate inflation expectations structurally
• Undermine investor confidence in U.S. financial markets
• Destabilize bond markets through credibility concerns
• Create broader financial stability risks

Context:

While the article doesn't specify the immediate catalyst for Rehn's remarks, his statement signals that European monetary authorities are closely monitoring the Fed's institutional independence. The warning comes from a senior ECB official seeking higher office, suggesting this issue carries weight within European central banking circles.

The statement underscores the interconnected nature of global financial markets and the critical role central bank independence plays in maintaining price stability and market confidence across major economies.