Christine Lagarde, the President of the ECB, just recently expressed her concerns over the deteriorated growth outlook. She pointed out that global trade uncertainties are a key factor. This week, Trump is increasing the pressure on Federal Reserve Chair Jerome Powell to start lowering interest rates. He cautions that the U.S. economy would come to a crawl if these rates were to remain this high.
Lagarde’s comments provide a fascinating window into the murky world of international currency manipulation. Crucially, they focus on how these dynamics impact monetary policy in today’s economy. As a counterpoint, she illustrated one of the most dramatic ways Trump’s trade war might impact the nation’s growth prospects. This is likely to create a double whammy of difficulty for the Fed. Powell has already cautioned that the trade war started by Trump could push inflation up. Yet, in parallel, these tensions have the potential to suppress economic prosperity.
Economic pressures are increasing. The U.S. relationship with the European Union (EU) continues to be one of the most essential priorities. Lagarde rejected Trump’s assertion that the EU treats the U.S. unfairly in trade, stating that the goods surplus is only one aspect of a complex relationship that includes services and foreign direct investment.
“There is so much joint interest between the U.S. and Europe,” she stated. “There might be sectors where serious negotiations need to be had, but it’s as always with trade… it’s not just on one side, it’s on both sides.” – Christine Lagarde
Lagarde understands there is some ground open to discussion. She pushed for the industry to be further protected by calling on policymakers to step into the ring and fight their battles.
“I am sure that there is scope for negotiations,” she added. “It’s in the nature of policymakers to want to sit down and argue their case and point out their imperatives, their red lines, their vulnerabilities, and I’m sure that there can be a dialog.” – Christine Lagarde
Fifth, Trump’s pressure on Powell threatens the independence of the Federal Reserve. That’s particularly worrisome given that Trump himself appointed Powell to that post during his first term. The president has reportedly come to find out that Powell’s term is set by law and is looking for legal ways to fire him before then.
Lagarde said she hoped that would not be the case, stressing the need for continuity and stability inside the Fed.
“I certainly hope not… I hope that it is not a risk,” she remarked regarding the possibility of Trump firing Powell. – Christine Lagarde
The ECB now has its own struggles to contend with, as it tries to avoid economic catastrophe in the eurozone. Furthermore, the central bank has repeatedly lowered interest rates in reaction to inflation approaching its 2% target. As such, both of them stand to traverse a hostile, ongoing landscape filled with perils directly stemming from established trade policies and vague economic projections.