Moody’s lowered the United States’ sovereign credit rating on Friday, citing concerns over the nation’s growing $36 trillion debt burden. This action could complicate President Donald Trump’s efforts to implement tax cuts and is expected to create ripples throughout global markets.
Moody’s initially assigned the United States its top-tier “Aaa” rating in 1919 and is now the last of the three major credit rating agencies to take such a downgrading step.
Friday’s one-notch reduction to “Aa1” follows the agency’s revision of its outlook on the sovereign in 2023 to “negative” due to increasing fiscal deficits and higher interest payments.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s stated on Friday, as it revised its outlook on the US from “negative” to “stable.”
The announcement drew criticism from allies of Trump.
Stephen Moore, former senior economic advisor to Trump and an economist at the Heritage Foundation, described the move as “outrageous.” He told Reuters, “If a US-backed government bond isn’t triple A-asset then what is?”
White House communications director Steven Cheung responded to the downgrade via a social media post, specifically criticizing Moody’s economist, Mark Zandi, whom he labeled a political opponent of Trump.
Zandi declined to comment. It’s important to note that Zandi is the chief economist at Moody’s Analytics, a separate entity from the credit ratings agency Moody’s.
Since returning to the White House on January 20th, Trump has stated his intention to balance the budget, while his Treasury Secretary, Scott Bessent, has repeatedly affirmed the current administration’s goal of lowering US government funding costs.
However, the administration’s attempts to increase revenue and decrease spending have thus far failed to convince investors.
Trump’s efforts to cut spending through Elon Musk’s Department of Government Efficiency have fallen significantly short of their initial targets. Furthermore, attempts to raise revenue through tariffs have triggered concerns about a potential trade war and global economic slowdown, unsettling markets.
If these concerns remain unaddressed, they could lead to a bond market sell-off and impede the administration’s ability to pursue its agenda.
The downgrade, which occurred after the close of markets, caused yields on Treasury bonds to rise. Analysts suggest it could prompt investors to exercise caution when markets reopen for regular trading on Monday.
“It basically adds to the evidence that the United States has too much debt,” commented Darrell Duffie, a Stanford finance professor and former member of Moody’s board. “Congress is just going to have to discipline itself, either get more revenues or spend less.”
Focus on Deficit
Trump is currently urging lawmakers in the Republican-controlled Congress to pass a bill extending the 2017 tax cuts, a key legislative achievement of his first term. Nonpartisan analysts predict this move will add trillions to the federal government’s debt.
The downgrade coincided with the tax bill’s failure to clear a crucial procedural hurdle on Friday, as hardline Republicans demanding deeper spending cuts blocked the measure, representing a rare political setback for the Republican president in Congress.
Moody’s stated that the fiscal proposals under consideration were unlikely to result in a sustained, multi-year reduction in deficits. The agency estimated that the federal debt burden would rise to approximately 134% of gross domestic product by 2035, compared to 98% in 2024.
“Moody’s downgrade of the United States’ credit rating should be a wake-up call to Trump and Congressional Republicans to end their reckless pursuit of their deficit-busting tax giveaway,” Senate Democratic Leader Chuck Schumer said in a statement on Friday. “Sadly, I am not holding my breath.”
The downgrade follows a similar action by rival agency Fitch, which also lowered the US sovereign rating by one notch in August 2023, citing anticipated fiscal deterioration and repeated last-minute debt ceiling negotiations that threaten the government’s ability to meet its financial obligations.
Fitch was the second major rating agency to strip the United States of its top triple-A rating, after Standard and Poor’s did so following the 2011 debt ceiling crisis.
“They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory,” said Brian Bethune, an economics professor at Boston College, referring to Republican lawmakers.
Market Fragility
Investors rely on credit ratings to assess the risk profiles of companies and governments when they seek financing in debt capital markets. Generally, a lower rating for a borrower translates to higher financing costs.
“The downgrade of the US credit rating by Moody’s is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States,” stated Spencer Hakimian, chief executive at Tolou Capital Management, a hedge fund.
Long-dated Treasury yields, which increase when bond prices fall, could rise further in response to the downgrade, according to Hakimian, unless positive economic news increases safe-haven demand for Treasuries.
The downgrade occurs amidst heightened uncertainty in U.S. financial markets, as Trump’s decision to impose tariffs on key trade partners in recent weeks has sparked investor concerns about increased price pressures and a sharp economic slowdown.
“This news comes at a time when the markets are very vulnerable and so we are likely to see a reaction,” said Jay Hatfield, CEO at Infrastructure Capital Advisors.
