In his latest client note, Stephen Jen warns that 2025 marks a turning point: fiscal dominance is beginning to erode the power and influence of central banks. Rising long-term borrowing costs across the US, UK, France, and even Germany reflect deep investor unease about fiscal sustainability.
“2025 is the year when fiscal dominance starts to erode the power and influence of central banks.” — Stephen L. Jen, September 3, 2025
The note argues that high debt stocks, entrenched welfare expectations, and political resistance to spending cuts are leaving central banks increasingly subservient to fiscal authorities. In this environment, bonds in developed markets are beginning to behave more like those in emerging markets — vulnerable to “triple sells” of bonds, equities, and currencies when growth slows.
Jen also highlights the moral hazard created by a decade of QE, which softened attitudes toward fiscal discipline and left governments reliant on central banks to suppress yields. With passive QT underway, markets are now facing the consequences of that long-standing dependence.
Table of Contents
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Fiscal imprudence and fiscal dominance
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Fed independence: red herring or real risk?
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Fiscal regime shifts and the end of bonds as safe havens
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A decade of QE and the moral hazard problem
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