The International Monetary Fund has taken a veiled swipe at President Trump’s threats against the Federal Reserve, warning of the vast financial risks of undermining central bank independence.
In its latest update on the world economy, the Washington-based fund issued its most explicit defence of central bankers after the US president has consistently threatened to fire Jerome Powell, chairman of the Federal Reserve, for not lowering interest rates.
The IMF, which is traditionally cautious about taking jabs at the US, its largest shareholder, said countries who undermined independent central banks were at risk of a bond market crisis, as investors will demand ever higher compensation for funding their fiscal deficits. Without naming the Fed, the IMF said independent monetary policy is “a cornerstone of macroeconomic, monetary and financial stability”.
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“It is important to reaffirm and preserve the principle of central bank independence,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said. “The evidence is overwhelming that independent central banks, with a narrow mandate to pursue price and economic stability, are essential to anchoring inflation expectations.
“That central banks around the world achieved a successful ‘soft landing’ despite the recent surge in inflation owes a great deal to their independence and hard-earned credibility,” he said.
Pressure on Powell is expected to ramp up this week as the Fed makes its latest interest rate decision on Wednesday. Financial markets are expecting no change to US borrowing costs for the fifth meeting in a row, but there is growing dissent within the Fed’s ranks about the need to loosen monetary policy this year.
Trump has reportedly drafted a letter calling for Powell’s dismissal but has stepped back from firing the chairman over concerns it will trigger further turmoil in the US dollar and bond market.
The president has railed at Powell for not cutting interest rates to support a slowing jobs market this year and has accused the central banker of mismanaging a renovation of the Fed’s buildings — citing it as a possible grounds for firing him. Powell’s term is due to end next year and a series of candidates are vying to replace him.
In a warning against lower interest rates, the IMF said that the US economy would continue to suffer from inflation rates about the Fed’s 2 per cent target because tariffs will raise the prices of goods as companies will pass on their higher bills.
“Tariffs, acting as a supply shock, are expected to pass through to US consumer prices gradually and hit inflation in the second half of 2025,” the IMF said.
The Trump administration has hit out at the fund and the World Bank for “mission creep” in their lending and failing to police China’s trade surpluses over the past decade. Scott Bessent, US treasury secretary, in April said the administration would not quit the lender but would demand major reforms to its lending operations.
The IMF said the US’s ballooning budget deficit made it vulnerable to a loss of confidence from international creditors and undermined the position of the dollar as the world’s safest asset.
“An increase in US term premiums led by concerns regarding fiscal sustainability could also make financial markets excessively volatile, especially if it interacts with concerns about geoeconomic fragmentation and the future of the international monetary system centered on the dollar,” it said.