Federal Reserve Independence Faces Severe Test Amid Political Pressure

The independence of the Federal Reserve is currently under its most severe test in decades, according to a member of the European Central Bank's Executive Board. This situation poses significant risks that could have far-reaching implications for both the market and the economy. The official emphasized that the trust in the central bank's commitment to price stability is crucial for anchoring inflation expectations, a principle that has been upheld since the control of double-digit inflation in the 1980s.

The official highlighted that the credibility gained from independence enhances the effectiveness of monetary policy, allowing the central bank to avoid taking drastic measures in response to temporary economic disruptions. This statement comes amidst ongoing pressure from the U.S. President to lower interest rates and increasing attacks on the Federal Reserve. The official's remarks were made in the context of recent attempts to remove a Federal Reserve governor, further escalating tensions.

Support for the Federal Reserve and its Chair has been voiced by numerous central bank officials, including the new head of the Bank for International Settlements. The official from the European Central Bank downplayed the likelihood of Europe facing similar challenges, citing the region's tradition of central bank independence and the legal framework enshrined in the EU treaty. However, the official acknowledged that the situation in the U.S. could have spillover effects, potentially impacting the independence of central banks in other countries through financial markets and political discourse.

Regarding inflation in the euro area, the official noted that the trajectory of inflation over the next few months remains uncertain. The European Central Bank and its colleagues are closely monitoring the situation and are prepared to act if necessary. Market expectations suggest that the European Central Bank will maintain the deposit rate at 2% for the second consecutive month in September, allowing policymakers to assess the impact of recent EU-U.S. trade agreements. However, geopolitical tensions and trade wars continue to cast a shadow over economic prospects. In the short term, factors such as falling energy prices, a stronger euro, and slowing service sector inflation are expected to push inflation below the 2% target.