Trump's war on the Fed threatens global financial stability, European central bankers warn

• Global central bank heads including the Bank of England's Andrew Bailey and ECB President Christine Lagarde issued a joint statement defending Powell against Trump's pressure campaign
• Bank of Finland Governor Olli Rehn warned that undermining Fed credibility could cause a structural rise in global inflation with worldwide ramifications given the U.S. economy's systemic importance
• Citi analysts caution that populist government pressure on central banks could spread to Europe, as shorter-term government debt makes countries more sensitive to rate decisions and vulnerable to political interference

Summary

Key Development: President Trump's pressure campaign against Federal Reserve Chair Jerome Powell has triggered warnings from European central bankers about threats to global financial stability. The DOJ launched a criminal probe into Powell over a $2.5 billion Fed headquarters renovation, which Powell characterized as a political attack for refusing White House demands to cut interest rates faster.

Major Figures and Responses: Former ECB Governor Jean-Claude Trichet called the situation "extremely grave," warning that an "obedient" Fed under executive control contradicts the U.S. Constitution and mirrors monetary policy practices in emerging markets with weak institutions. Bank of Finland Governor Olli Rehn warned that undermining Fed credibility could cause structural global inflation. Bank of England's Andrew Bailey and ECB President Christine Lagarde issued a joint statement defending Powell.

Systemic Concerns: Trichet highlighted that global debt-to-GDP ratios (public and private) currently exceed levels seen before the 2008 Lehman Brothers collapse, creating "great vulnerability." He criticized the bipartisan U.S. consensus to continuously increase spending, warning markets are "way too calm given the risks."

Market Implications: Citi analysts cautioned that central bank independence risks could spread to Europe through future populist governments. As government bond maturities shorten—with fewer investors buying 30-year paper—debt servicing costs become more sensitive to rate decisions, potentially increasing political pressure on the ECB and Bank of England to lower rates.

Bottom Line: The nearly 50-year consensus on central bank independence in developed economies faces unprecedented challenge, with potential ramifications for global inflation, financial stability, and investor confidence in sovereign debt markets.