Yellen Warns of 'Fiscal Dominance' as Debt Burden Threatens Fed Independence

Former Federal Reserve Chair and Treasury Secretary Janet Yellen has issued a stark warning regarding the trajectory of the US economy, citing “Fiscal Dominance” as a growing structural threat. This scenario, where a central bank is forced to keep interest rates low primarily to service government debt rather than manage inflation, is becoming a tangible risk for the Federal Reserve.

The Debt Trap

The Congressional Budget Office (CBO) projects the US federal deficit will hit $1.9 trillion this year, with total debt expected to reach roughly 100% of GDP and climb to 118% over the next decade.

2026 Policy Outlook: Restrictive vs. Accommodative

As the Fed navigates this fiscal minefield into 2026, the policy path remains clouded by political friction and leadership uncertainty.

Market Implications

For Forex traders, this dynamic creates a long-term dilemma for the USD. While higher deficits traditionally weaken a currency, the higher yields required to fund that debt currently support the Dollar. However, if the market senses the Fed is losing its inflation-fighting mandate to service debt, the “vigilante” response could lead to a steeper yield curve and potential long-term USD debasement.