Banks fear being caught in Fed's storm

Global central bankers gathered at a US mountain resort over the weekend are starting to fear that the political storm surrounding the Federal Reserve may engulf them too.

US President Donald Trump's efforts to reshape the Fed to his liking and pressure it into interest rate cuts have raised questions about whether the US central bank can preserve its independence and inflation-fighting credentials.

Trump, frustrated by the legal protections given to the Fed's leadership and the long terms for Board of Governors members meant to outlast any given president, has put intense pressure on Chair Jerome Powell to resign and is pushing to oust another board member, Governor Lisa Cook.

If the world's most powerful central bank were to yield to that pressure, or Trump finds a playbook for removing its members, a dangerous precedent would be set from Europe to Japan, where established norms for the independence of monetary policy may then come under new attack from local politicians.

Central banks around the world have already started preparing for the fallout, telling lenders on their watch to watch their exposure to the US currency.

More fundamentally, a Fed capitulation would end a regime that has brought relative price stability and has lasted at least since late Chair Paul Volcker vanquished high inflation 40 years ago.

Markets so far have not registered deep concerns about the Fed's independence. US equity markets are roaring, and there hasn't been the sort of jump in Treasury yields or inflation expectations that would be emblematic of the Fed's credibility being seen at risk.

While Trump can name a new chair when Powell's term as the chief policymaker ends in May, he needs more departures among the Fed's seven-member board for his appointees to gain majority control. The Fed's network of 12 regional reserve banks, whose leaders take turns voting on interest rate policy, is a further counterweight, hired by local boards of directors as a way to distance them from Washington's influence.