Federal Reserve officials on Monday responded with caution to Moody’s recent downgrade of the US government’s credit rating, acknowledging the potential ripple effects on economic conditions while steering clear of political commentary.
“We will put that downgrade in the same perspective that we do with all incoming information: What are the implications of this in terms of us achieving our mandated goals without commenting on what that downgrade might mean in sort of a political economy context,” said Fed Vice Chair Philip Jefferson at a conference hosted by the Federal Reserve Bank of Atlanta.
On Friday, Moody’s ratings agency lowered the US government’s credit rating by one notch, citing concerns over rising deficits and unsustainable interest costs. It marked the final move among major credit rating agencies to reduce the US sovereign rating from its highest level.
Although not an immediate issue for the Fed, the downgrade could lead to higher borrowing costs over time. This, in turn, could restrict economic activity and become a factor in shaping the Fed’s monetary policy decisions.
Potential economic ripple effects
“The downgrade will have implications for the cost of capital and a bunch of other things, and so it could have a ripple through the economy,” said Atlanta Fed President Raphael Bostic in a CNBC interview. With market conditions evolving, “I think we’ll have to wait three to six months to start to see where this settles out, and I think that’ll be an important determinant about people’s willingness and appetite for investing in the US “
While the US government’s long-term fiscal challenges are not new, they are now heightened by current high spending levels and a proposed Republican budget plan that may add further debt. Simultaneously, aggressive trade policies under the Trump administration—especially the imposition of high tariffs—have cast doubt on the US as a stable investment destination.
Markets react, Trump disagrees
Stock markets declined and bond yields rose on Monday as investors digested the downgrade news. President Donald Trump, meanwhile, expressed disagreement with the rating agency’s move.
Speaking at a Mortgage Bankers Association conference in New York, New York Fed President John Williams acknowledged the market turbulence but advised against overreacting.
“We have heard over the last few months, there are some rumors or concerns about, well, do investors want to be so heavily invested” in Treasuries and other dollar assets given big government policy changes and large levels of economic uncertainty,” Williams said. Nevertheless, he noted investors “have viewed and continue to view” the US as “a great place to invest, including Treasuries, fixed income assets, so I think that that narrative is still there.”
Long-term confidence at stake
Minneapolis Fed President Neel Kashkari highlighted the long-term implications of investor confidence.
“Right now there’s a question mark being raised about what is the US competitive position going to be relative to other advanced economies around the world,” Kashkari said. “There’s more of a question mark than there was a year ago or two years ago,” he added. “We don’t know right now” how this will all shake out.
The traditional role of US government bonds as a global safe haven is under scrutiny. Concerns are growing that markets may struggle to absorb the growing supply of Treasury debt, particularly as trade policy may dissuade international investment.
Shifting global investor preferences
Evercore ISI analysts emphasised the broader implications: “The sell-America theme in today’s trading with US bonds, stocks and the dollar all pointing sharply lower on Moody’s US rating downgrade suggests this is serving as a coordinating device for an underlying shift in global investor preferences coming out of Trump tariff and wider geoeconomic shocks that is still in process.”
They added: “The fact that US Treasuries and the dollar are not rallying now is striking and shaves away a fraction of the attractiveness of Treasuries going forward.”
Uncertainty over lasting impact
Despite market jitters, some analysts see limited long-term fallout. Barclays analysts wrote to clients Monday: “We expect few consequences from the Moody’s downgrade.”
Fed officials also reiterated a cautious stance on future monetary policy. John Williams said the economy is currently in a good place, with interest rate policy “well positioned” for future developments. Raphael Bostic, meanwhile, signaled a slower path toward the Fed’s inflation goal: “I am leaning much more into one cut this year.”
With inputs from Reuters