Lagarde emphasized that there is a huge value for both FED and ECB The independence of the central bank from current policy. She admitted that she and Powell are accustomed to the pressure of the authorities, but “the mandate is our compass.”
Her Public Declaration of Support for the American counterpart is not exclusively due to friendly solidarity. The stake is the predictability of monetary policy in the world's largest economy, on which the architecture of global markets is based.
Donald Trump shakes the economy
For many months, Trump has been demanding aggressive cuts of interest rates, claiming that otherwise the US economy will slow down.
On the Truth Social President once again He called Powell “Mr. Too Late” (in free translation: You are too late)and his administration examines the formal possibilities of interrupting the term of the Fed head ahead of time.
Powell himself replied last week that trade wars unleashed by the White House could slow down growth and conquer inflation. He also signaled the readiness to “wait for more brightness” before the Fed decides about the next step in foot policy.
Special offer
Lagarde has several reasons to count that this confrontation will not end in resignation. First of all, the destabilization of the FED in the middle of the election cycle would threaten ankle volatility of the profitability of American bonds, rapid strengthening or weakening of the dollar and the spilling of turbulence into European markets. EBC – after seven foot cuts from last summer – Balances today between extinguishing inflation and the risk of recession in the euro area. A sudden shock from the US would extend this path.
Secondly, the precedent of political interference in the independence of the Fed could spill into other central banks. This is particularly dangerous for Europe, where a common monetary policy requires exceptional markets trust in Frankfurt. Any weakness of this credibility would raise a risk bonus on European government debt and made the ECB difficult to fight the deflation of stimulated commercial uncertainty.
The third reason is more pragmatic: although the ECB and Fed roads have distributed in recent quarters, both institutions exchange data, They run currency swaps and coordinate activities in crisis situations. Powell's dismissal would mean weeks, if not months, difficult transatlantic communication – just when the world economy is struggling with the effects of increased duties and weakening trade.
For now, Powell stays
For now, the idea of removing the President of the FED remains legally doubtful. Experts estimate that even if Trump found a way, he would have to replace the entire seven -person management Fomc resistance realistically and force deep foot reductions. The mere fact that the market must consider such an eventuality is already reflected in the valuations of assets and inflation expectations.
That is why Lagarde, with all his respect for Powell's work, also has a hard macroeconomic interest in that the Fed does not become another field of political battle in Washington.
If the US President decides to go to the collision, he not only risks the loss of investors' trust in American monetary policy, but also the transfer of tensions for the Atlantic – and then all participants of global financial markets will be borne.
