Christine Lagarde has fired a warning shot at Donald Trump, cautioning that America’s economy risked instability if the president sought to interfere with the Federal Reserve.
Ms Lagarde, the president of the European Central Bank, insisted that central banks must remain independent if they were to focus on their jobs of controlling inflation and supporting the economy.
If monetary policy independence is undermined, “it becomes dysfunctional, it starts doing things that it shouldn’t do”, she said in an interview with Fox News, adding: “The next step is disruption. It is instability, if not worse. So I think that this should not be debated.”
Although she did not mention the US president by name, Ms Lagarde’s comments come against a backdrop of increased pressure from Mr Trump on the Fed and its chairman Jerome Powell.
The US president appointed Mr Powell to the role during his first term in the White House, but has subsequently called the monetary policymaker a “numbskull” and “Mr Too Late” for his refusal to slash interest rates.
Mr Trump has also criticised the cost of renovation works at the Fed, raising fears in financial markets that he may seek to sack Mr Powell.
Last month the US president said he had considered sacking the central banker, but that he saw that step as “highly unlikely”. Mr Powell’s term of office expires next May.
The Fed’s headline interest rate is currently 4.5pc, but the president has argued it should be as low as 1pc.
Mr Powell and the fellow interest rate setters on the Federal Open Markets Committee are charged with keeping inflation low while supporting employment.
The minutes of their latest meeting show growing concerns that Mr Trump’s tariffs on imported goods are pushing inflation upward, while the unemployment rate remains low – though there are concerns the jobs market may be weakening.
Ms Lagarde said the Fed must not be undermined.
“The independence of any central bank is critically important,” she said. “We have to be accountable, we have to report back and answer all the questions of either Congress in the US or the European Parliament, for me. But it’s vitally important that a central bank is independent.”
Economists typically view central bank independence as a way to prevent politicians from cutting interest rates to suit the electoral timetable, potentially seeking to engineer a temporary boom in spending and growth, which ultimately backfires with surging inflation in subsequent years.
The aim of independence – which took place in the UK with the establishment of the Monetary Policy Committee in the late 1990s – is to reduce the risk of a boom-bust cycle, and put the economy on a stronger footing for the longer-term.
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