Moody’s Downgrades U.S. Credit Rating — The Market Awaits Trump’s Next Move.

On May 14, 2025, the United States and China agreed to lower their previously high tariffs—145%—to 30% and 10% respectively for a 90-day grace period. The market interpreted this move as a ceasefire and responded with a relief rally, with some viewing it as a potential prelude to an official end to the trade war. However, the reality likely leans more toward a calculated pause—one designed to buy time for both nations to prepare for a more decisive confrontation. At the core of this strategy lie concerns over inflation and economic growth.

For the U.S., the trade war with China isn't merely a dispute over goods—it's a structural conflict involving technology, energy, capital, and supply chains. The deeper objective is to reset global production flows—shifting manufacturing back to the U.S. while breaking China's dominance over global consumption. Yet such a transformation can't happen overnight, especially with China pursuing its own long-term strategic ambitions. Recognizing the potential for intensified conflict, both nations appear to be using the 90-day window to reinforce their respective positions. For the U.S., this means finalizing trade deals with alternative suppliers to replace Chinese goods and preparing for the inflationary and recessionary risks that would accompany full-blown tariff escalation.

China, in turn, views this grace period not as a truce but as time to prepare for the next round of confrontation. Unlike the U.S., China must secure energy imports from abroad—especially from the Middle East and Russia—to sustain its industrial and AI ambitions. It is actively reinforcing those energy partnerships. On the trade front, China is working with Vietnam, South Korea, and African countries to bypass direct exports to the U.S., seeking to strip the “Made in China” label from its goods. Financially, it is exploring stablecoin settlement networks and increasing gold reserves to mitigate its dependency on the dollar. In short, China is shoring up its defenses across technology, energy, trade, and finance to prepare for a multidimensional economic war.

While both sides are methodically reinforcing their positions to buffer the economic shock from a prolonged trade war, a new risk has emerged—Moody’s downgrade of the U.S. credit rating. This move rattled the bond market, pushing up yields on 10-year Treasuries. Higher yields translate into rising borrowing costs, reduced consumer spending, and diminished investment—potentially derailing the very conditions the U.S. needs to launch a comprehensive trade offensive.

To offset this shock and stabilize the bond market, the U.S. must now pursue policies that ease interest rates. Several options are on the table. First, relaxing the Supplementary Leverage Ratio (SLR) requirement would allow banks to hold more Treasuries without increasing capital burdens—boosting demand and lowering yields. Second, the Federal Reserve could be pressured more directly to signal future rate cuts. While actual rate reductions may not happen immediately, dovish guidance alone can calm the market. A potential Trump-Powell meeting and subsequent alignment on inflation and policy may help facilitate such a shift. Lastly, the U.S. could re-engage foreign buyers—especially traditional bond-holding allies like Japan and Gulf nations—by offering diplomatic or trade incentives.

All of these measures serve a single purpose: stabilizing the Treasury market to create a favorable macro environment for launching a high-cost, high-stakes tariff campaign. Time, however, is limited. The asset market remains fragile and prone to sharp corrections. The sooner these policies are deployed, the better the chances of sustaining internal demand and preparing for escalation. Delay could result in surging interest rates and market dislocation—undermining the very strategy the U.S. is working to execute.

Investors should recognize that the market environment has shifted dramatically from just a week ago. The post-tariff-deal optimism has faded, and markets are once again walking on thin ice, awaiting the next decisive move from the U.S. If the next steps are market-friendly, a rebound could follow. If not, a sharp correction may be unavoidable. The real danger, however, is that all of this is happening before the actual trade war even resumes. In this context, maintaining sufficient cash reserves becomes more important than ever for investors navigating this volatile phase.