FRANKFURT — Any erosion of the U.S. Federal Reserve’s independence could trigger higher inflation and potentially jeopardize overall financial stability, according to Finnish central bank Governor Olli Rehn, who spoke on Wednesday about the importance of maintaining central bank autonomy. Rehn, a candidate for European Central Bank (ECB) vice president, expressed full support for Fed Chair Jerome Powell in preserving the institution’s credibility.

“If the independence of the Federal Reserve were undermined, we could witness a structural rise in inflation,” Rehn told CNBC during an interview. He emphasized that central bank autonomy is a cornerstone for maintaining market confidence and economic stability, particularly in the U.S., where the Fed plays a pivotal role in global financial markets.

Central Bank Independence and Market Confidence

Rehn warned that any political interference or threats to the Federal Reserve’s independence could have serious consequences for both financial markets and bond markets. “This kind of action may weaken the credibility of financial markets, and that’s why it’s crucial for U.S. bond markets and the broader financial system that monetary independence is preserved,” he said.

His remarks come amid ongoing discussions about the delicate balance between central banks and government influence. Economists often stress that independent central banks are better equipped to manage inflation without succumbing to short-term political pressures, which in turn sustains confidence among investors, businesses, and consumers.

Olli Rehn’s Vision for the European Central Bank

As Rehn campaigns to become the next vice president of the ECB, his comments reflect a broader concern in Europe regarding monetary policy independence. The ECB, like the Fed, relies on its autonomy to set interest rates, control inflation, and ensure financial stability across the Eurozone. Rehn’s support for Fed independence underscores a shared global principle: maintaining credible, autonomous central banks is essential for economic stability.

Implications for Inflation and Financial Stability

Economists note that any political pressures on central banks can result in higher inflation expectations, which may lead to rising interest rates and volatility in financial markets. Rehn’s statement serves as a reminder of the delicate role that institutions like the Fed and ECB play in stabilizing the economy. A perceived loss of independence could erode investor confidence, disrupt bond markets, and create ripple effects throughout the global economy.

Global Financial Markets Take Note

Investors and policymakers closely monitor statements from central bankers like Olli Rehn because they often signal potential shifts in monetary policy frameworks and market sentiment. Rehn’s insistence on protecting Federal Reserve independence highlights the interconnectedness of U.S. and European financial systems, and the global stakes involved in maintaining robust and autonomous monetary institutions.