UBS: Politicization of the Federal Reserve Will Increase U.S. Treasury Risk Premium

According to a report by Jinse Finance, Paul Donovan, Chief Economist of UBS Global Wealth Management, stated that increased politicization of the Federal Reserve will lead the U.S. bond market to price in a higher risk premium due to inflation uncertainty. He pointed out that this will drive up real borrowing costs, increase the U.S. government's debt servicing expenses, reduce the scope for fiscal stimulus, and lead to decreased corporate investment. It will also undermine—but not destroy—the U.S. dollar’s status as a reserve currency. Last Friday, in his speech at Jackson Hole, Federal Reserve Chair Jerome Powell left the door open for a rate cut in September but did not propose an “appropriate medium-term policy framework” or offer a strong defense of the Fed’s independence. Meanwhile, U.S. President Trump has continued to call for rate cuts from the Federal Reserve in recent months.