Threats to the Fed's Independence Pose Risks to Global Financial Stability

Central banks' independence is sacrosanct, allowing policymakers to operate free from political meddling and set interest rates without interference. However, attacks on the Federal Reserve, the most influential central bank in the world, are causing concern among investors and economists. The threats to the Fed's independence risk upending global financial markets, potentially disrupting the finances of countries and companies abroad. The value of the dollar, held as a reserve currency by many central banks, could also fluctuate.

Key Takeaways:

• The independence of central banks is essential for setting interest rates free from political interference, and threats to the Fed's independence could have far-reaching consequences for global financial stability.
• Turmoil in U.S. financial markets poses risks to the finances of countries and companies abroad, particularly those holding a large share of their reserves in dollars.
• The yields on long-term U.S. government debt, used as benchmarks for interest rates worldwide, could spike if Jerome Powell, the Fed's chair, is fired, economists warn.
• Risks to the Fed's independence could threaten the supply of dollars to central banks through swap lines, a potential threat to global financial stability.
• The United States is seen as a role model, so threats to the Fed's independence could chip away at independence in other central banks, exacerbating the current environment of uncertainty.
• In the past, central banks that succumbed to political pressure have faced "devastating effects" on inflation for citizens and companies, often bringing countries to the brink.
• The example of Turkey, where President Erdogan's pressure on the central bank led to soaring inflation and a plummeting currency, serves as a cautionary tale.
• Christine Lagarde, the president of the European Central Bank, has described Jerome Powell as "the standard of the courageous central banker," highlighting the importance of the Fed's independence.

Statistics:

• Nearly 90 percent of all cross-border transactions involve the use of the U.S. dollar (Bank for International Settlements).
• The value of the dollar held as a reserve currency by many central banks is significant, and fluctuations in the dollar's value could have far-reaching consequences.
• The yields on long-term U.S. government debt could spike to 4.5% if Jerome Powell is fired, according to economists (Jumana Saleheen).
• The U.S. dollar is used in one side of nearly 90% of cross-border transactions (Bank for International Settlements).
• The value of the dollar could sink by 10% if Jerome Powell is fired, according to economists (Jumana Saleheen).
• Turkey has had five central bank governors in the past six years due to President Erdogan's pressure.
• The inflation rate in Turkey has climbed above 80% and remains at a punishingly high level of 35% due to the lack of central bank independence.

Sources:

• Christine Lagarde, president of the European Central Bank
• Jerome H. Powell, chair of the Federal Reserve
• Stefan Ingves, former governor of the Riksbank (Sweden's central bank)
• Jumana Saleheen, economist at Vanguard
• Katharine Neiss, economist at PGIM Fixed Income
• Agustín Carstens, former general manager of the Bank of International Settlements
• Bank for International Settlements
• The New York Times (caption to photo)