European central bank governors are leaving an annual gathering with their US counterparts without assurances that established norms of global cooperation will remain intact, raising fears of further disruption in an already strained relationship with Washington, according to people familiar with the discussions.
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Policymakers at the US Federal Reserve made efforts this week to ease their counterparts’ concerns, pledging to honor all of their commitments.
However, more than six officials said that, given the separation between the central bank and the administration, policymakers could not guarantee that US President Donald Trump would not make abrupt policy changes. The officials spoke on the sidelines of the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole.
The officials, who requested anonymity, said recent interventions by the US Treasury to support the Japanese yen and reduce long-term US borrowing costs were particularly concerning, as they could signal further interventions and departures from established norms.
Following the yen transaction on August 1, US Treasury Secretary Scott Bessent said the department had sold euros against the Japanese currency and told regional central banks that the move was simply a “reallocation of resources.” On Friday, he said the foreign exchange assets used to purchase yen had come from the Treasury’s Exchange Stabilization Fund.
European officials were particularly unsettled, however, by the fact that Washington had not informed them in advance that the euro sale was part of the transaction.
“It caused anger... You always call and tell them beforehand,” one official said. “The message that came across was that the United States does whatever it wants.”
Others were more understanding, saying the transaction was so unusual that the failure to provide advance notice may have been an unintended oversight.
Spokespeople for the European Central Bank and the Federal Reserve declined to comment.
A US official said the US-Japan intervention was intended to counter disorderly moves in the yen and support stability in global financial markets.
“It wasn't directed at anyone else,” the official said. “The Treasury maintains close and continuous communication with our international counterparts, but we do not comment on the substance of those discussions.”
European central bank governors are also concerned about Bessent’s plan to increase buybacks of longer-term Treasury securities, transactions that may need to be financed through the issuance of additional short-term debt. Like the yen purchase, the plan could suggest that the administration is willing to take unconventional measures to reduce borrowing costs.
“Normally, these interventions provide only a temporary solution,” a second source said. “But clearly they are concerned. What comes next? Will they pressure the Federal Reserve to start buying bonds from the market?”
The Federal Reserve is solely responsible for setting US monetary policy and operates independently of the elected administration in carrying out that mandate. However, the sources said Trump had demonstrated a willingness to take extraordinary steps to impose his will.
Their concern is that such moves could trigger market disruptions extending far beyond the United States.
The US official reiterated previous statements that increasing longer-term Treasury buybacks is intended to provide greater liquidity in longer-dated assets where the Treasury receives high-quality buyback offers.
“It is not monetary policy or an attempt to put a ceiling on interest rates,” the official said.
A US Treasury official told reporters on Thursday, however, that the department was “really focused on bringing down long-term yields” because they had risen above what the Treasury considers “fair value.”
Some sources said another concern among European officials was that political interference could eventually extend to the dollar liquidity backstops provided by the Federal Reserve to the world’s largest central banks, which are a key pillar of global financial stability.
These currency swap lines allow commercial banks around the world to maintain access to dollars, particularly during periods of financial stress.
The Federal Reserve renews the arrangements annually based on its assessment that they ultimately protect US interests and markets. During severe disruptions in global markets, foreign banks could otherwise be forced to sell large amounts of US securities they hold if access to the swap lines were unavailable.
“Rationality does not always prevail with this administration,” a third source said. “When they pursue retaliatory trade policies with their closest allies, Trump could simply say, ‘They are taking advantage of us,’ and the currency swap lines could disappear overnight.”
The sources said there was no indication so far that the arrangements were at risk and that they still expected them to continue unchanged. The Federal Open Market Committee itself authorizes the currency swap lines, which are managed exclusively by the Federal Reserve rather than the US administration.
The US Treasury official said decisions regarding what the Federal Reserve provides and the currency swap arrangements fall under the central bank’s authority.
“There is nothing to suggest otherwise in any of the Treasury’s announcements regarding the yen transactions or debt buybacks,” the official said.
Source: Reuters
