Adam Posen Calls for Central Banks to Pool Dollar Reserves Amid Fed Politicization Concerns

On September 3, 2025, Adam Posen, President of the Peterson Institute for International Economics, addressed a European Central Bank (ECB) conference hosted by President Christine Lagarde. Posen recommended that central banks, including the ECB, consider pooling their U.S. dollar reserves to ensure liquidity during financial crises. He expressed concerns that the U.S. Federal Reserve's support might become unreliable due to increasing politicization under President Donald Trump. Posen emphasized the need for alternative arrangements, such as swap lines between major central banks, to mitigate potential risks. He noted that while the Fed had renewed liquidity lines earlier in the year, there were concerns about its future willingness to assist foreign banks. Given the global market's heavy reliance on U.S. dollar instruments, existing foreign reserves might be inadequate in a major crisis. Posen also highlighted the potential importance of regional mechanisms like the ASEAN's Chiang Mai Initiative and the Arab Monetary Fund. Additionally, ECB regulators are monitoring banks’ foreign currency exposures and exploring long-term strategies to reduce reliance on the dollar, including developing a digital euro to lessen dependence on U.S. payment systems like Visa and Mastercard.

Posen's remarks come amid growing concerns about the Federal Reserve's independence. President Trump has publicly criticized the Fed's monetary policy decisions and has taken steps that some view as encroaching on the central bank's autonomy. In August 2025, Trump attempted to remove Federal Reserve Governor Lisa Cook, citing unsubstantiated allegations of mortgage fraud. Cook has since filed a lawsuit challenging her dismissal, arguing that the president lacks the authority to remove a Fed governor without cause. This unprecedented move has raised alarms about the potential politicization of the Federal Reserve and its implications for global financial stability.

The global financial system is heavily reliant on the U.S. dollar, with approximately €25 trillion ($29 trillion) in dollar-denominated bonds and loans issued outside the United States. In contrast, foreign central banks collectively hold about €7 trillion in dollar reserves. This disparity suggests that existing reserves may be insufficient to address liquidity needs during a major financial crisis. Posen's proposal to pool dollar reserves and establish alternative swap lines aims to provide a buffer against potential disruptions stemming from uncertainties surrounding the Federal Reserve's support.

Regional financial mechanisms, such as the ASEAN's Chiang Mai Initiative and the Arab Monetary Fund, could play a crucial role in this strategy. These arrangements are designed to provide liquidity support among member countries, reducing dependence on external sources. Additionally, the ECB is actively exploring the development of a digital euro. This initiative aims to decrease reliance on U.S. payment systems like Visa and Mastercard, further insulating the European financial system from potential external shocks.

The politicization of the Federal Reserve has broader implications for global financial markets. Investor confidence in the Fed's independence is paramount for maintaining market stability. Actions perceived as undermining this independence can lead to increased market volatility and higher borrowing costs. For instance, recent political interventions have been linked to a weakening of the U.S. dollar and a surge in demand for alternative assets like gold.

In conclusion, Posen's recommendations underscore the need for proactive measures to safeguard global financial stability. By pooling dollar reserves and developing alternative financial mechanisms, central banks can mitigate risks associated with potential shifts in U.S. monetary policy. These steps are essential to ensure that the international financial system remains resilient in the face of evolving political and economic landscapes.