By Francesco Canepa, Howard Schneider and Leika Kihara
JACKSON HOLE, Wyoming (Reuters) -Global central bankers gathered at a U.S. mountain resort over the weekend are starting to fear that the political storm surrounding the Federal Reserve may engulf them too.
U.S. President Donald Trump’s efforts to reshape the Fed to his liking and pressure it into interest rate cuts have raised questions about whether the U.S. central bank can preserve its independence and inflation-fighting credentials.
Trump, frustrated by the legal protections given to the Fed’s leadership and the long terms for Board of Governors members meant to outlast any given president, has put intense pressure on Chair Jerome Powell to resign and is pushing to oust another board member, Governor Lisa Cook.
If the world’s most powerful central bank were to yield to that pressure, or Trump finds a playbook for removing its members, a dangerous precedent would be set from Europe to Japan, where established norms for the independence of monetary policy may then come under new attack from local politicians.
“The politically motivated attacks on the Fed have a spiritual spillover to the rest of the world, including Europe,” European Central Bank policymaker Olli Rehn, from Finland, said on the sidelines of the Fed’s annual symposium in Jackson Hole, Wyoming.
That’s why Rehn and colleagues were enthusiastically backing Powell to stand his ground, even after he signaled a possible rate cut in September. Powell was met by a standing ovation when he took the podium at the conference.
‘NOT BE TAKEN FOR GRANTED’
Conversations with a dozen central bankers from across the world on the sidelines of the Fed’s getaway in the shadows of the Grand Teton Mountains revealed that a scenario in which the Fed sees its ability to counter inflation jeopardized by a loss of independence was taken as a direct threat to their own standing and to economic stability more broadly.
It would likely entail major turmoil in financial markets, they said, with investors demanding a greater premium to own U.S. bonds and reassessing the status of Treasury securities as the lifeblood of the global financial system.
Central banks around the world have already started preparing for the fallout, telling lenders on their watch to watch their exposure to the U.S. currency.
More fundamentally, a Fed capitulation would end a regime that has brought relative price stability and has lasted at least since late Chair Paul Volcker vanquished high inflation 40 years ago.