Fed Officials Take Cautious View on US markets Amid Downgrade

• On Friday, Moody’s ratings agency lowered the U.S. government’s credit rating one notch amid mounting concerns over deficits and interest costs that remain at an unsustainable pace. It was the last of the major ratings agencies to cut the U.S. sovereign rating from the highest level.
• U.S. Federal Reserve officials speaking on Monday took on cautiously the ramifications of the latest downgrade of the U.S. government’s credit rating and unsettled market conditions as they continued to navigate a very uncertain economic environment.
• "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," Fed Vice Chair Philip Jefferson said at a conference held by the Federal Reserve Bank of Atlanta.
• While not an imminent issue for the Fed, over time, higher market borrowing costs tied to a deteriorating U.S. financial position make credit generally more expensive and create restraint on economic activity. In turn, that becomes a consideration for how the Fed sets monetary policy and its expectations for the longer-run path of economic activity.
• 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, speaking in a CNBC interview on Monday. With the economy in flux, "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 U.S."
• While concerns about the government’s financial position have existed for years, and Fed officials have regularly warned that long-run borrowing trends have been on an unsustainable path, ongoing huge levels of spending, joined with a Republican budget plan now under consideration that’s likely to add even more debt, are raising fears of a nearing crisis.
• At the same time, the aggressive and erratic trade policy agenda of the Trump administration, which targets most of the world’s nations with high tariffs in a bid to bring more factory work back to the U.S., is shaking confidence in the U.S. as a reliable place to invest.

(Source: Reuters)