How Trump's attack on the US Federal Reserve could affect the EU

US President Donald Trump's tariff policy has turned the global economy upside down in recent weeks. But his latest attempts to influence US monetary policy could trigger a global financial crisis.

Brussels – Last week, Trump repeatedly attacked US Federal Reserve Chairman Jerome Powell. Powell had refused to lower interest rates to support the economy. Trump's punitive tariffs on US trading partners had significantly worsened the country's economic outlook.

“There may be virtually no inflation, but there may be a SLOWING of the economy unless Mr. Too Late [Powell], a big loser, cuts rates NOW,” Trump wrote on his social media platform Truth Social earlier this week.

The US Federal Reserve is a cornerstone of the global financial system. Trump's attack on its independence caused US stocks and government bonds to plummet. The US dollar also weakened, falling to a three-year low against other currencies.

Although Trump later stated that he had "no intention" of firing Powell before the end of his term in May 2026, the nervousness remains.

Worldwide consequences

If the central bank's independence is undermined, this could have massive global consequences, experts warn. "This is truly frightening," says Maria Demertzis, economic analyst at the think tank The Conference Board Europe.

"The danger of a financial crisis is very real if the Fed is attacked. And if the US is in a financial crisis, the whole world is affected."

Niclas Poitiers of Bruegel, a Brussels-based economic think tank, takes a similar view. Politicizing the US Federal Reserve would be "far more catastrophic than tariffs."

While Trump's trade measures would likely have a noticeable impact on global growth, Poitiers said they are unlikely to plunge the global economy into recession. He expects a maximum decline in GDP in the eurozone of 0.5 percentage points.

The situation is different if confidence in the Fed is lost: Any influence on US monetary policy would quickly impact global financial markets and trigger a worldwide recession, according to Poitiers.

“If the Fed is subject to the same political whims as tariff policy, we are putting ourselves in an extremely dangerous situation.”

A spokesperson for the EU Commission declined to comment on Trump's attacks on Powell. He did, however, point to the "essential importance" of the European Central Bank's independence for the "credibility and effectiveness" of monetary policy in the euro area.

Finance ministers and EU commissioners want to take up the issue with their US colleagues at the spring meetings of the International Monetary Fund and the World Bank in Washington, according to EU sources.

Chance for the euro?

Despite the risks of a financial crisis, some analysts also see opportunities for the European economy in Trump's attempts to exert influence

ING's Chief Economist for Germany and Austria, Carsten Brzeski, pointed to possible capital flows to Europe if the dollar loses its safe haven status. Investors could increasingly invest in EU government bonds – with positive effects on borrowing costs.

In the long term, a loss of confidence in the US Federal Reserve could also strengthen the euro as a global reserve currency. Currently, the euro holds around 20 percent of global currency reserves, and the US dollar about 60 percent.

Philipp Lausberg of the European Policy Centre sees the US's "exorbitant privilege"—the role of the dollar as the world's reserve currency—at risk. A politically controlled central bank increases uncertainty and is "poison for the dollar, US debt, and the stock market."

If the Federal Reserve gives in to Trump's pressure and lowers interest rates, this could weaken the dollar against the euro - with negative consequences for the competitiveness of European exports, warned ING chief economist Brzeski.

Even in this scenario, the relative affordability of imported American goods would reduce inflationary pressures in the eurozone, which could give the European Central Bank room to cut interest rates.

What if Powell were removed?

In the short term, a number of legal and procedural hurdles would stand in the way of Trump dismissing Powell early, analysts say.

Some also pointed out that even if Powell were removed as chairman, he would still be a member of the 12-member Federal Open Market Committee, the body that sets the central bank's monetary policy.

Experts largely agree that Powell will not give in to Trump's demands as long as he remains in office. Some believe that Trump's public attacks could also lead Powell to oppose a rate cut even more decisively—to avoid the perception of political influence.

Regardless of Powell's future, however, analysts warn that there is a serious risk that the next chairman—who will take office in May 2026—could be willing to follow Trump's monetary policy ideas.

"Even if [Trump] doesn't fire him, the decision for next year is just as worrying," Demertzis said. "If it's someone the markets don't trust, that's just as damaging."

(om)