Federal Reserve Meeting Debrief: May 2025

Traditions Wealth Advisors
Jade Chapman/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
May 23, 2025

U.S. Credit Rating Downgrade Marks a Historic Shift

• 3 major credit agencies: S&P, Fitch, Moody’s
• Credit rating scale: AAA (highest) to D (default)
• AAA rating benefits
  • Low borrowing costs
  • Investor confidence
  • Indicator of economic stability
• Recent history
  • S&P downgrade: 2011 (AAA to AA+)
  • Fitch downgrade: 2023 (AAA to AA+)
  • Moody’s downgrade: May 2025 (AAA to Aa1)
  • Significance: First time U.S. has no AAA rating from any agency

Reasons for the Moody’s downgrade:

• Debt levels:
  • $36 trillion national debt
  • Debt-to-GDP projected >130% by 2035
• Chronic Deficits:
  • Ongoing gap between spending and revenue
• Interest payments:
  • Expected to consume nearly 1/3 of federal revenue by next decade
• Political instability:
  • Gridlock, shutdowns, debt ceiling standoffs
  • Lack of bipartisan fiscal reform

Macroeconomic Implications:

• Symbolic but meaningful
• Impact on Treasuries
  • Still seen as safe, but perceived risk has risen
  • Higher yields demanded by investors (30-year yield >5%)
• Potential outcomes:
  • Increased borrowing costs
  • Crowding out of private investment
  • Weakened business/consumer confidence
  • Policy complications
• Institutional effects:
  • Some funds may be restricted from holding Aa1-rated securities
  • Possible portfolio rebalancing

What this means for clients:

• More of a signal than a shock
• U.S. Treasuries remain among the safest and most liquid assets
  • Short term effects:
    • Modest changes in interest rates (especially on long-duration fixed income instruments)
    • Treasury yields have already risen slightly
    • Equity markets may experience short-term volatility

Conclusion & Reassurance

• U.S. strengths remain:
  • Deep capital markets
  • Strong institutions
  • Dollar’s reserve currency status
• Opportunity for reform:
  • Downgrade = wake-up call, not crisis
  • Time for long-term bipartisan fiscal policy solutions
  • Goal: restore AAA status and ensure stability