Patrick Honahan, the former Governor of the Central Bank of Ireland, said today that any loss of US Federal Reserve independence was not just bad for the US but bad for the world.
Speaking on RTÉ's Morning Ireland, Mr Honohan said that while disagreements between central banks and governments are not unusual, what is different in this case is the "weaponising" of the legal system and an apparent attempt to intimidate the US Federal Reserve.
"It is an attempt - as we have seen in other cases - to use the legal system against the institutions that have made the US such a strong economy," he said.
He also said is is not surprising for a property developer - Donald Trump - to think that low interest rates are better than high interest rates, but added that while low rates now may seem like a good idea they would likely lead to economic instability and higher inflation down the road.
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That is why the Fed does not want to lower interest rates to the 2.5% rate that President Trump seems to want, he added.
Finnish central bank Governor Olli Rehn also said today he expressed "full solidarity" with Fed Chair Jerome Powell, adding that any loss of US Federal Reserve independence would push up inflation and might even endanger financial stability.
"If the independence of the Federal Reserve were to be undermined, that would mean that we could see a kind of structural rise of inflation," Rehn, who is running to become the European Central Bank's next vice president, told CNBC.
"This kind of action or threats to central bank independence may undermine the credibility of financial markets and also bond markets, and that's why, in my view, it is important also for the US bond markets and US financial stability, that central bank independence, monetary independence, is maintained," he said.
The chiefs of many of the world's major central banks yesterday issued a joint statement in support of Federal Reserve chair Jerome Powell after the Trump administration threatened him with a criminal indictment.
Jerome Powell is at the centre of a US administration's criminal probe about the renovation of the Fed's headquarters, which he called a "pretext" to win presidential influence over interest rates.
The heads of the European Central Bank, the Bank of England, the Bank of Canada and eight other institutions said Powell had acted with integrity and that central bank independence was crucial for keeping prices and financial markets stable.
"We stand in full solidarity with the Federal Reserve System and its Chair Jerome H Powell," the central bankers said in a rare joint statement.
"The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve," they added.
Central bankers fear that political influence over the Fed would erode trust in the bank's commitment to its inflation target. This would lead to higher inflation and global financial market volatility.
Since the US is the world's dominant economy, it would likely export this higher inflation via financial markets, making it more difficult for other central banks to keep prices stable.
"It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability," the group of central bankers said.
It included the central bank chiefs of Sweden, Denmark, Switzerland, Australia, South Korea, Brazil and France, as well as the chair of the Bank for International Settlements, an umbrella body.
