NEWS

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, has warned of the serious consequences that could result from a potential U.S. credit rating downgrade by Moody’s, stressing that the impact would go beyond financial aspects and affect the broader U.S. economy.

Bostic emphasized that a downgrade in the U.S. sovereign credit rating would not only increase the cost of capital but could also cause significant disruptions across various economic sectors. He also noted that the potential impact on demand for U.S. Treasury bonds remains unclear and highlighted the importance of monitoring how the markets react to these developments in the coming period.

Inflation and Tariffs Complicate the U.S. Economic Outlook

Bostic touched on the mounting challenges related to U.S. inflation and newly proposed trade tariffs, pointing out that American consumers may not be able to fully absorb the costs of these additional tariffs, especially given the increasing pressure on household budgets.

He noted that it may take three to six months before the real effects of these factors become evident. This underscores the need for monetary policy flexibility to navigate these complex conditions.

Fed Rate Cut Outlook for 2025: Likely Only One Reduction

Regarding interest rate projections for 2025, Bostic expressed his preference for only one rate cut this year, based on current and expected economic conditions, especially the economic implications of the new U.S. tariffs.

He stressed that it will take time to fully understand the economic impact of these tariffs on consumer spending and investment behavior.

U.S. Bond Market Shows Resilience Despite Uncertainty

Despite persistent market uncertainty, Bostic confirmed that the U.S. bond market continues to function efficiently. He also suggested that extended transition periods linked to tariff implementations could gradually alter consumer behavior.

Bostic admitted that U.S. inflation has not been falling as quickly as anticipated, which complicates the path forward for policymakers. In his view, inflation now presents a greater concern than the employment situation.

Inflation a Bigger Concern Than Jobs Right Now

The Fed official made it clear that the current worry is not job losses, as there has been no major wave of layoffs. Instead, the focus is on rising costs and persistent inflation, which are narrowing the options for households, businesses, and policymakers alike, potentially shifting the economic trajectory in the near term.

Sentiment and Economic Data May Soon Align

Bostic observed a gap between investor sentiment and actual economic data, but he believes this gap may begin to narrow soon—especially with signs that the current inventory liquidation cycle is coming to an end.

As for the market volatility seen in April 2025, he stated that it did not approach the level of a full-blown financial crisis. Rather, it reflected investor adjustments to new tariff information. Even low-level tariffs on Chinese imports, he noted, carry important economic implications.