MNI SOURCES: ECB Monitors Markets For Fed Independence Fallout

The European Central Bank is closely watching  what it sees as an attack on the independence of the U.S. Federal Reserve, but while Eurosystem sources acknowledged the potential for fallout including a slide in the dollar they noted the relatively calm market reaction requiring no ECB policy response so far.

“We will need to continue monitoring the currency and its impact on inflation and the wider economy. But we obviously need to see numbers, not pre-suppose any outcomes,” one official said. While a stronger euro tends to put downward pressure on inflation and output, the ECB does not target any specific level for the exchange rate, the official added.

The bar for cutting because of FX developments would be a high one, even if the exchange rate does have an impact on inflation, another source said. A third official argued that the main concern should not be any appreciation against the dollar but rather a rise in the euro’s trade-weighted value. (See MNI SOURCES: ECB Seen On Hold For Extended Period)

“If there isn't a general strengthening across the board, it significantly lessens the chance of increased deflationary pressures and the need for any policy action,” he said.

President Donald Trump might also be forced to correct course should U.S. Treasuries come under pressure, another official noted.

While ECB officials agreed with Fed Chair Jerome Powell that a U.S. Justice Department investigation into him was designed to bully the central bank into further lowering interest rates, they noted also that such pressures started months ago, with public calls for easier policy by President Donald Trump and his attempt to remove Fed Governor Lisa Cook. (See MNI INTERVIEW: Political Pressure On Fed Risks Inflation Spike)

BOARD SEATS

The Justice Department move against Powell appears to be aimed at pushing the chair, whose term leading the Fed ends in May, to also give up his right to stay on as a governor until 2028, one Eurosystem official said.

“It is highly unlikely that any prosecution will get to court before his term as chair ends, so this is aimed at the board seat. If Cook isn't ousted and Powell stays on, the only way for any outside Fed chair to be appointed under current legislation would be for [Fed Governor Stephen] Miran to step down. But Trump was as many vacant seats as he can get to stuff with appointees,” the official said.

While there is no prospect of an ECB policy response for now, it would be prepared to act quickly should a spike in the euro add to disinflationary pressures or if financial stability is at risk, another Eurosystem official said, noting that while the exchange rate is not at worrying levels it is at the upper end of tolerance.

“It so sad to see this happening in the USA,” the official said.

Earlier on Tuesday, the heads of many global central banks including the ECB issued a statement in support of Powell, who they said had “served with integrity, focused on his mandate and an unwavering commitment to the public interest”

An ECB spokesperson declined to comment.