[UBS Warns of Increased U.S. Treasury Risk Premium Due to Fed Politicization]
Paul Donovan, Chief Economist at UBS Global Wealth Management, stated that the increasing politicization of the Federal Reserve could lead to higher risk premiums in the U.S. bond market due to inflation uncertainty. This trend would drive up real borrowing costs, increase the U.S. government's debt repayment pressure, thereby reducing fiscal stimulus capacity and dampening corporate investment. Furthermore, this situation could weaken the U.S. dollar's status as a reserve currency, though it would not completely undermine its dominance.
Last Friday, Federal Reserve Chair Jerome Powell left room for a rate cut in September during the Jackson Hole meeting but did not outline a clear mid-term policy framework or strongly defend the Fed's independence. Meanwhile, U.S. President Donald Trump has recently continued to pressure the Federal Reserve to take action on rate cuts.
