This is an unprecedented case in the history of the US Federal Reserve: in a video message, the chairman of the US central bank Jerome Powell informed the public that the Department of Justice is threatening to indict him for the renovation of the Federal Reserve buildings and that he has received a subpoena in this regard.
Powell: This is just a pretext
With unusual frankness, Powell clearly states that for him this lawsuit is just a pretext. "The threat of punitive consequences is a result of the fact that the Federal Reserve sets interest rates based on our best judgment of what is in the public interest, rather than following the president's preferences," he says in the published video.
According to Powell, the stakes are high: the question is whether the Federal Reserve will continue to be able to set interest rates based on facts and economic indicators, or will it become hostage to political pressure and threats, writes the German public media ARD.
Economists are worried
"Apparently the Federal Reserve believes that its independence is so seriously threatened that it wants to mobilize the public," commented Bernd Weidensteiner, an economist at the German Commerzbank. According to him, the conflict between the government and the central bank has reached a new level.
Economists and market observers around the world are sounding the alarm. Andrew Lilly of the investment bank Barrenjoey in Sydney warns that Trump is shaking the independence of the Federal Reserve.
Stocks fall, gold prices rise to record highs
This is far from Donald Trump's first attack on the independence of the US central bank, ARD recalls. He tried to fire its governor Lisa Cook, and the case is currently being considered by the Supreme Court. He has also pressured Jerome Powell to cut interest rates - often with offensive posts on his Truth Social platform.
The new escalation of the dispute between Trump and the Federal Reserve has caused turmoil in financial markets. American futures are showing a serious decline, and significant losses are expected on Wall Street on the stock exchange these days. Investors are getting rid of stocks, dollars and US government bonds and are heading for safe havens such as gold, which has reached a record price again. For the first time it exceeded 4600 dollars, ARD points out.
What will happen when Powell's term expires?
So far, the market has underestimated the risks for monetary policy associated with Trump's repeated attacks on the independence of the Federal Reserve. It remains to be seen whether the threat of prosecution against Powell will make some market participants realize the seriousness of the situation.
In May, Powell's term at the head of the Federal Reserve expires and Donald Trump is likely to appoint someone loyal to him as head of the central bank. At the moment, everything indicates that his chosen one will most likely be his supporter and chief economic adviser Kevin Hassett. Experts expect that if he succeeds Powell in office, interest rates could fall significantly and inflation could rise.
The stability of the global financial system is in danger
But the stakes are much higher: the consequences will be felt far beyond the borders of the United States. The Federal Reserve is a special central bank with a special responsibility: the dollar is the world's reserve currency, and US government bonds are considered "safe havens", recalls ARD.
However, investor confidence in the dollar and US government bonds is not a law of nature. With his attacks on the independence of the Federal Reserve, Trump risks a collapse of the dollar and an increase in long-term bond yields. In other words, it is about the stability of the global financial system.
Especially considering that only a fully functional and independent US central bank is able - in the event of a crisis - to fulfill its role as lender of last resort. We saw how important this is during the 2008 financial crisis, the analysis by the German public media also says.
Author: Angela Göpfert (ARD)