The Battle for Central Bank Independence
Isabel Schnabel, from the ECB, warns that undermining the Federal Reserve's independence could increase borrowing costs globally. President Trump pressures the Fed for lower rates, risking market trust. The dollar's dominance remains essential, despite potential alternatives like the euro.
European Central Bank board member Isabel Schnabel has issued a warning against curtailing the independence of the U.S. Federal Reserve, suggesting such actions could inadvertently raise borrowing costs and destabilize the global financial system. Schnabel's comments came amid mounting pressure by U.S. President Donald Trump on the Fed to reduce interest rates.
Trump's persistent demands, including public disparagement of Fed Chair Jerome Powell and attempts to remove Fed officials, represent a critical test of the Fed's political autonomy. Schnabel highlighted that central bank independence historically reduces risk premia and improves financial conditions, a principle threatened by political interference.
While Trump argues for rate cuts to encourage investment and alleviate high mortgage payments, politically motivated reductions might lead to investor distrust and long-term inflation. Despite some European suggestions that the euro could challenge the dollar's dominance, Schnabel maintains the dollar remains unrivaled as the global financial system's key currency.
(With inputs from agencies.)
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