ECB has no room for complacency as attack on Fed raises risks, Kazaks says

• Kazaks described the U.S. attack on Fed independence as 'emerging market politics' that could lead to higher inflation and interest rates for American consumers
• Additional risks include AI-driven market valuations creating potential bubbles and China's aggressive trade policies involving subsidies and exchange rate manipulation
• ECB rates remain appropriate as core inflation measures move closer to the 2% target, though Kazaks advocates for a European response including potential industrial policy

ECB Warns of Rising Risks Amid U.S. Fed Independence Concerns

Key Points:

European Central Bank policymaker Martins Kazaks issued a warning that the ECB has "no room for complacency" as threats to Federal Reserve independence create new economic risks. The Latvian central bank governor, a candidate for ECB vice-president, stated the U.S. administration's attack on Fed Chair Jerome Powell represents "emerging market politics" typically unseen in developed economies.

Major Risk Factors Identified:

Kazaks highlighted three primary concerns affecting the economic outlook:

• Threats to Fed independence, including reported criminal indictment threats against Powell
• Potential financial bubble in artificial intelligence sector
• China's aggressive trade policies, including subsidies, export restrictions, and currency management potentially violating WTO rules

Market Implications:

The ECB official warned that any erosion of Fed independence would likely trigger higher U.S. inflation, ultimately forcing higher interest rates that would hurt American consumers. He called for a European response to China's trade practices, including tariffs and potential industrial policy measures.

Eurozone Outlook:

Despite external risks, Kazaks indicated current ECB interest rates remain "at an appropriate level." He noted positive developments in eurozone inflation, with core inflation measures—which exclude volatile components—moving closer to the ECB's 2% target.

Bottom Line:

The comments underscore growing concern among European policymakers about spillover effects from U.S. political interference in monetary policy and geopolitical tensions, even as the eurozone's domestic inflation picture improves. Markets should monitor developments around Fed independence and U.S.-China trade dynamics for potential volatility.