European central bankers fear US moves could jolt markets

European central bankers have raised concerns that recent US interventions in currency and government debt markets could herald further policy disruption, potentially transmitting volatility from the United States to the wider global financial system.

More than half a dozen officials familiar with discussions at the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium told Reuters that they remained uncertain whether established norms of international financial cooperation would continue to hold.

Federal Reserve policymakers sought to reassure their European counterparts that the US central bank would honour its commitments. However, because the Fed and the Trump administration operate separately, they could not guarantee that the White House would avoid sudden policy changes.

Spokespeople for the Federal Reserve and European Central Bank declined to comment.

Yen intervention strains policy trust

One immediate source of tension was the US Treasury’s participation in an operation with Japan to support the yen after sharp and disorderly movements in the currency.

Treasury Secretary Scott Bessent confirmed that Washington used foreign-currency assets in its Exchange Stabilization Fund to buy yen. The transaction included the sale of euros, which he characterised as a reallocation of US resources.

European officials were irritated that they had not received the advance notice normally expected when another government planned to sell their currency as part of an intervention. Some interpreted the omission as evidence that Washington was increasingly prepared to act unilaterally, although others said the unusual nature of the transaction could have resulted in an oversight.

A US official said the intervention was intended to counter disorderly yen movements and support global financial stability, rather than target Europe or any other economy.

Bessent has argued that severe currency movements could force investors to unwind positions, destabilise international markets and ultimately increase borrowing costs for US households and businesses.

Debt buybacks fuel borrowing-cost concerns

European officials are also watching the Treasury’s plans to expand buybacks of longer-dated US government securities.

Such transactions could require the Treasury to issue more short-term debt to finance purchases of longer-maturity bonds. The officials feared the strategy could be interpreted as an attempt to restrain longer-term borrowing costs through unconventional market intervention.

Some also questioned whether the administration might eventually pressure the Federal Reserve to buy bonds directly if Treasury operations provided only temporary relief. They warned that any resulting dispute over monetary independence could trigger market disruption extending far beyond the United States.

The Treasury has maintained that its buybacks are intended to improve liquidity in parts of the longer-dated bond market rather than conduct monetary policy or impose an interest-rate ceiling.

The Treasury Borrowing Advisory Committee has similarly described liquidity support as the programme’s principal objective and said communication was essential to prevent investors from interpreting the operations as an attempt to reshape the government’s overall debt-maturity profile.

The official explanation has not entirely removed the uncertainty. A Treasury official said during the week that the department was focused on lowering long-term yields because they had moved above what it considered fair value.

Dollar swap lines expected to remain protected

A longer-term concern is whether political intervention could eventually reach the Federal Reserve’s dollar liquidity swap lines with major overseas central banks.

These facilities allow foreign central banks to provide US dollars to financial institutions in their jurisdictions during periods of market stress. The Fed describes them as a mechanism for improving dollar funding conditions in the United States and overseas.

European officials stressed that there had been no indication that the swap lines were in danger, and they expected the arrangements to remain unchanged. The facilities are authorised by the Federal Open Market Committee and operated by the Fed rather than the Treasury or White House.

A Treasury official also said decisions involving Federal Reserve facilities and swap-line arrangements rested with the central bank, adding that neither the yen operation nor the bond-buyback programme suggested otherwise.

Federal Reserve Chair Kevin Warsh has sought to strengthen relations with overseas policymakers since taking office. He travelled to Europe shortly after beginning his term and left a broadly positive impression among officials, according to the people familiar with the discussions.

At Jackson Hole, Warsh also posed for the customary photograph with Bank of Canada Governor Tiff Macklem, a symbolic gesture as political and trade tensions between the United States and Canada continued to rise.

Bessent is due to discuss financial stability with G20 finance ministers and central bank governors in Asheville, North Carolina. The US agenda for the meeting also includes economic growth, global imbalances and efforts to isolate Iran.

Sources: Reuters, US Department of the Treasury