Will Trump Use the Federal Reserve as Leverage, Too?

As US President Donald Trump’s administration continues its aggressive trade and geopolitical realignments, global financial markets are now facing a new and potentially destabilizing uncertainty—whether the U.S. Federal Reserve will remain the world’s reliable backstop in times of crisis.

For decades, the Fed has played a crucial role in maintaining global financial stability by ensuring access to U.S. dollar liquidity. In times of panic, such as during the 2008 financial crisis and the 2020 COVID-19 market collapse, the Fed’s swap lines with foreign central banks provided lifelines to global markets desperate for dollars. But as Trump enters his second term, analysts fear that this vital support could become a bargaining chip in the administration’s foreign policy strategy.

Dollar Liquidity as Leverage?

The Federal Reserve, as the sole institution capable of creating dollars, holds a unique power in international finance. Its ability to open or close swap lines—mechanisms that allow foreign central banks to access dollars—has historically been guided by economic necessity, not politics.

However, Trump’s America-first approach has already upended traditional alliances and trade norms. His willingness to impose tariffs on long-standing allies and to condition security commitments on financial contributions raises concerns that access to dollar liquidity could be weaponized in a similar way.

“If Trump’s administration views financial support as leverage in foreign relations, the Fed’s role as the global lender of last resort may be compromised,” writes Christopher Smart, founder of the Arbroath Group, in his latest Foreign Policy analysis.

What’s at Stake?

Global markets depend on the stability and reliability of dollar flows. The vast market of dollar-denominated bonds, deposits, and currency swaps totals trillions of dollars. Any disruption—especially if triggered by politics rather than financial fundamentals—could spark panic.

If the next financial crisis hits and foreign central banks find themselves cut off from Fed swap lines, the repercussions could be severe. Higher borrowing costs, a dollar shortage, and destabilized financial systems in emerging and developed markets alike could follow.

Looking Ahead

With the Trump administration’s track record of using economic tools as political weapons, there’s a growing fear that the Federal Reserve’s global role could be reshaped. Whether the Fed maintains its independence and continues to act as a neutral guarantor of dollar liquidity remains an open—and critical—question for markets around the world.

🔗 Source: Foreign Policy – Will Trump Use the Federal Reserve as Leverage, Too?

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