UBS: Fed politicization will drive up Treasury risk premiums

Paul Donovan, chief economist at UBS Global Wealth Management, said the Fed's increased politicisation would lead to higher risk premia in US bond markets due to inflation uncertainty. This would push up real borrowing costs, increase US government debt service payments, mean less fiscal stimulus and less corporate investment, and would damage - but not destroy - the dollar's status as a reserve currency, he said. Fed chairperson Jerome Powell opened the door to a September rate cut in a Jackson Hole speech on Friday, but did not offer an "appropriate medium-term policy framework" or a robust defence of the Fed's independence. Meanwhile, US President Donald Trump has been calling for the Fed to cut interest rates in recent months.