Moody's Downgrade of US Credit Rating Stirs Economic Concerns
Moody’s Ratings has shaken the financial landscape by downgrading the United States government’s credit rating from the prestigious Aaa to Aa1. The decision stems from the chronic inability of various administrations to rein in escalating national debt. This unexpected move may complicate President Donald Trump’s initiatives to implement tax cuts and could create ripples across global markets.
The downgrade was announced on Friday, with Moody’s expressing concerns over the persistent failure of both US administrations and Congress to agree on crucial measures that could curb the trend of substantial annual fiscal deficits and rising interest expenses. Nonetheless, Moody’s highlighted the United States’ enduring credit strengths, including its large, resilient, and dynamic economy and the US dollar’s vital role as the global reserve currency.
Significantly, Moody’s is the last of the big three rating agencies to adjust the federal government’s credit rating downward. Standard & Poor’s downgraded the rating in 2011, and Fitch Ratings made a similar move in 2023.
Moody’s elaborated on its expectations of federal deficits widening, projected to approach 9 percent of the US economy by 2035, up from 6.4 percent in 2024. This expansion is primarily attributed to increased interest payments on debt, rising entitlement spending, and insufficient revenue generation.
In its statement, Moody’s also warned that extending Trump’s 2017 tax cuts, a critical agenda for the Republican-controlled Congress, could exacerbate the situation by adding $4 trillion to the federal primary deficit over the next decade, with the deficit figure excluding interest payments.
The downgrade provoked a strong reaction from White House communications director Steven Cheung, who criticized Moody’s economist Mark Zandi, labeling him as a political adversary of Trump and dismissing his evaluations as consistently inaccurate.
Echoing this sentiment, Stephen Moore, a former senior advisor to Trump and an economist at the Heritage Foundation, denounced the downgrade as “outrageous,” questioning what qualifies as a AAA asset if not US-backed government bonds.
The Department of the Treasury has yet to respond to requests for comment on this development from Reuters.
Bond Market Concerns
A politically stagnant system has hindered the ability to address the mounting deficits facing the US. Republicans are opposed to tax hikes, while Democrats resist spending cuts.
In a politically charged event on Friday, House Republicans failed to advance a substantial package of tax breaks and spending cuts in the Budget Committee. Defying expectations, a small faction of right-wing Republicans, demanding deeper cuts to Medicaid and President Joe Biden’s green energy tax breaks, joined Democrats in blocking the package – marking a rare political setback for Trump.
Since returning to the White House, Trump has vowed to balance the budget, with Treasury Secretary Scott Bessent emphasizing the administration’s commitment to reducing government funding costs.
However, initiatives to slash spending through Elon Musk’s Department of Government Efficiency have fallen short of expectations. Concurrently, attempts to bolster revenue through tariffs have raised fears of a trade war, threatening economic stability on a global scale.
Failure to address these concerns may incite a bond market disruption, adversely impacting the administration’s policy goals.
The rating downgrade, disclosed after markets closed, resulted in an uptick in Treasury bond yields, and experts anticipate potential market hesitation when trading resumes on Monday.
“It’s a huge surprise. Markets weren’t anticipating this,” commented Tom di Galoma, managing director of rates and trading at Mischler Financial in Utah.