Barry Eichengreen argues the dollar still has no true rival, but its safe-haven status is becoming less reliable because U.S. policy credibility, fiscal stress, and political dysfunction matter more than before. He says the Fed should prioritize inflation control after the Middle East energy shock, even if that means staying hawkish and clashing with the White House.
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This is a David Lin interview with Barry Eichengreen about the Federal Reserve, the dollar, gold, and the future of money. Eichengreen says the Fed is facing a classic negative supply-shock problem: higher energy prices push inflation up while growth weakens, forcing the central bank to choose between rate cuts for the labor market and higher rates to defend inflation credibility. He thinks the energy shock may persist, which strengthens the case for keeping rates elevated despite political pressure from Trump and Treasury Secretary Bessent. On Fed leadership, Eichengreen says it is too early to judge Kevin Warsh/Walsh, but the nominee would need to win credibility inside the FOMC and likely prioritize inflation control and Fed independence. …
Tactically, the setup favors a still-restrictive Fed and a dollar that can rally on risk-off, but with less conviction than before. Energy-led inflation risk and political noise around the Fed make long-duration assets vulnerable near term.
Over the next few months, the base case is sticky inflation, a cautious Fed, and intermittent dollar support unless policy credibility deteriorates further. Confirmation would come from persistent energy inflation and steady FOMC resistance to political pressure; a sharp policy reversal or easing of geopolitical stress would weaken that view.
Structurally, the interview argues that dollar dominance rests on institutions, alliances, and fiscal discipline, so reserve status can erode even without an immediate replacement. The long-run regime is one of gradual multipolar diversification unless U.S. governance and public finances remain credible enough to preserve the dollar premium.
The Fed is facing a classic central-banker nightmare because a negative supply shock raises inflation while also weakening the economy.
He explicitly describes the situation as a negative supply shock that means more inflation but also a weaker economy.
If the energy shock persists, the Fed will likely need to keep rates higher and prioritize inflation control over labor-market support.
He says persistent energy prices would force the Fed to address inflation rather than ease for growth.
Pressure from Trump and Bessent could make the Fed even more determined to hold rates high to prove it is credible on inflation.
He argues political criticism can backfire by forcing the Fed to signal independence and seriousness.
Is Kevin Warsh the right person to lead the Federal Reserve in your opinion?
Eichengreen says it's yet to be seen. Warsh faces a nightmare scenario of a negative supply shock causing both more inflation and a weaker economy. He'll need to convince his FOMC colleagues his leadership is worth following, and the energy shock persisting points toward raising rates, which will antagonize the White House.
Have Warsh's priorities changed since the Iran war began? And does your prior statement about him being a protector of central bank independence still hold after inflation has risen?
Eichengreen says we'll hear more about Warsh's priorities at his hearing, but inflation control will have to be a priority, meaning reasserting Fed independence from the Treasury and White House. Warsh may have to sacrifice his good fellowship with the president to protect the Fed's independence.
What is the White House going to do in response to the Fed asserting more independence?
Eichengreen says Trump and Bessant have suggested various measures from firing Fed governors like Lisa Cook, to ousting Jay Powell, to reconstituting the role of regional reserve bank presidents. He could imagine the White House doubling down on those measures, none of which would be good for monetary policy.
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