BIS Warns of Political Interference in Central Bank Independence Amid Trump-Powell Tensions

The Bank for International Settlements (BIS) has publicly defended the independence of central banks, warning about the growing risks of political interference in monetary policy. This intervention comes amid escalating tensions between U.S. President Donald Trump and Federal Reserve Chairman Jerome Powell, where Trump has publicly criticized Powell's handling of interest rates, calling him a “beast” and “stubborn.” Trump's demands for rapid rate cuts, despite persistent inflation and uncertain economic impacts, have raised concerns about financial stability and investor volatility.

The BIS, in its annual report, emphasizes the crucial role of an independent monetary policy, stating that central banks must be able to act according to their assessments, even if it contradicts government wishes. The report highlights the delicate balance central banks face: supporting economic growth through low rates versus preserving monetary value amidst rising public debt. This political pressure undermines the credibility of economic measures and could disrupt the global economy, including crypto markets.

The BIS warns that a Fed subjected to political power could set a dangerous precedent, threatening the credibility of economic measures. For holders of bitcoin or digital assets, this uncertainty could reinforce the thesis of a safe-haven asset outside the classic monetary system. Conversely, an economic crisis triggered by a loss of confidence in the Fed could cause a general decline in risky assets. The BIS's caution is aimed at protecting the global economy, where monetary independence could become a major geopolitical issue.

The BIS's annual report also highlights significant challenges posed by disruptive trade policies and economic uncertainty. The report notes that the global economy is facing "crisis levels" of uncertainty, primarily due to import tariffs imposed by the White House. The volatile period marked by tariff threats has made it increasingly difficult for some countries to achieve their 2% inflation target. The BIS report emphasizes that the growth outlook is deteriorating, consumer prices are stable, and risks to public finances and financial systems are increasing. Central banks are urged to focus on their core mission to maintain trust and enhance the effectiveness of their actions.

The Federal Reserve, in particular, is facing a challenging situation. Chairman Jerome Powell has resisted pressure from the White House to lower interest rates, despite rising inflation pressures and diverging inflation expectations. The BIS report warns about the risks posed by trade disruptions, which impact economies already strained by aging populations and labor shortages. These disruptions harm commodity supply and increase consumer sensitivity post-pandemic, potentially leading to new challenges for price stability. The recent surge in crude oil product prices, followed by some pullback, may alert policymakers to these risks.

The report also points out the risks associated with the unprecedented national debt accumulated by some countries. Interest payments of OECD member countries reached 4% of GDP last year and are expected to continue rising. The BIS warns that inflation and financial stability risks are more likely to stem from pressures in sovereign debt markets or their transmission. Concerns over fiscal sustainability may trigger refinancing challenges and potentially disrupt inflation expectations.

In response to these challenges, the BIS recommends several policy measures to promote growth and productivity. These include easing labor market restrictions, reducing bureaucracy, eliminating trade barriers, and increasing public investment, while also suggesting fiscal repair. In terms of regulation, the BIS warns against relaxing bank regulatory requirements and calls for close monitoring of financial institutions. The BIS also advises central banks to strike a "cautious balance" between growth and inflation risks, especially given that the era in which consumers calmly dealt with price shocks seems to have ended. Any price increase now provokes a greater reaction, raising concerns that this is not just a simple price increase but affects inflation dynamics.

The BIS's warnings come at a critical juncture for the global economy, as trade tensions and geopolitical uncertainties continue to pose significant risks. The report serves as a call to action for policymakers to address these challenges and ensure the stability of the global financial system. The BIS's intervention underscores the importance of maintaining the independence of central banks to safeguard financial stability and economic growth.