Moody’s, one of the three largest credit rating agencies in the world, just downgraded the United States’ credit score. The agency’s decision to lower the rating from AAA to Aa1 reflects growing concerns over the U.S. government’s mounting debt and rising interest payments.
The first sector affected by this decision was the American Bond market, as investors rushed to sell U.S. Treasuries, causing yields to spike. The 30-year Treasury yield surged to 5.012%, while the 10-year jumped to 4.54%, marking a significant breakdown in bond market stability.
Moody’s cited America’s growing government debt and high interest rates as a reason for the downgrade. Even noting that similar sovereign nations with comparable debt levels have maintained stronger credit ratings.
In reality, this puts both Jerome Powell and Donald Trump in check. While Powell has been resistant to the idea os slashing interest rates amidst growing economic uncertainty—a bond market crash could make the Fed Chair reconsider.
Meanwhile, the White House may feel pressured to reach a resolution—or at least temporarily de-escalate—the ongoing trade war with China. If the economy continues to slow down due to trade tensions, the chances of an ongoing weak bond market grow.
Despite their grievances, Trump and Powell may feel the need to join forces to prevent a complete economic crash. While the Fed may feel pressured to slash rates, it’d benefit everyone if the President facilitated a broader policy shift to stabilize markets.
Powell has undoubtedly the hardest decision to make: does he cut interest rates to alleviate the debt burden? Because doing so would risk inflation growing back in the American economy. The latest CPI print revealed a cooler-than-expected inflation rate, which is an early sign that the U.S. economy could survive an interest rate slash without growing inflation.
With the next FOMC meeting set for June 18, all eyes will be on Jerome Powell and the Federal Reserve as they navigate mounting pressure to adjust interest rates. The bond market turmoil and Moody’s downgrade have intensified calls for a policy shift, but the Fed remains cautious about reigniting inflation.
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