**UBS Highlights Risks of a Compromised Federal Reserve** UBS is worried that a compromised Federal Reserve could lead to significant inflation, higher borrowing costs, and slower economic growth. Market participants are increasingly concerned as doubts about the Fed’s independence may lead to rising yields and more volatility. UBS described Federal Reserve Chair Jerome Powell’s speech at Jackson Hole as typical. He hinted at a possible rate cut in September to address trade tariff impacts but didn’t offer a solid medium-term economic plan. Although markets reacted positively to the idea of a rate cut, UBS noted that the speech mainly focused on data and included some extra rhetoric. The bank pointed out the lack of a strong defense for the Fed’s independence, especially with political risks like Trump potentially dismissing Governor Lisa Cook. UBS warns that a Fed influenced by politics could reignite inflation fears, potentially raising real borrowing costs by one percentage point. This could negatively impact fiscal policy, corporate investment, housing affordability, household savings, and speculative actions. Concerns about the Federal Reserve’s independence are creating a tense market environment. Inflation could become a serious issue, as shown by the July 2025 Consumer Price Index (CPI), which came in at 4.1%. This figure has raised alarm over ongoing price pressures and led to a sharp increase in expectations for future borrowing costs. **Inflation and Market Volatility** Given the current political and economic uncertainty, it’s wise to prepare for rising market turbulence. We see value in adopting long volatility positions, such as through VIX futures or call options, as the index has moved above 22. This strategy can act as a hedge against potential “inflation chaos” in the near future. We should also expect higher risk premiums in the bond market. The 10-year Treasury yield has already surpassed 4.75%—a level we haven’t seen since the inflation spike in 2023. Traders might look into put options on long-duration bond ETFs or consider paying fixed on interest rate swaps to protect against further increases in yields. Concern about slow economic growth suggests a more cautious approach to equities. While there has been talk of a “classic Powell” pivot in the past, current data makes that less likely. In fact, Fed funds futures are indicating less than a 20% chance of a rate cut next month—a significant change from two months ago—which could remove a crucial support for stock valuations. Create your live VT Markets account and start trading now.

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