Federal Reserve Meeting Debrief: May 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