U.S. Loses Last Triple-A Credit Rating
Moody’s downgrades the U.S. government, citing large fiscal deficits and rising interest costs
Key Points
- Moody’s downgraded the U.S. credit rating to Aa1 due to large deficits and rising interest costs.
- Runaway budget deficits mean U.S. government borrowing will balloon at an accelerating rate, Moody’s said.
- The move strips the U.S. of its last remaining triple-A credit rating from a major ratings firm.
The U.S. has lost its last triple-A credit rating.
Moody’s Ratings downgraded the U.S. government on Friday, citing large fiscal deficits and rising interest costs.
Expanding budget deficits mean U.S. government borrowing will rise at an accelerating rate, pushing interest rates up over the long term, Moody’s said. The firm said Friday that it didn’t believe that any current budget proposals under consideration by lawmakers would do anything significant to reduce the persistent gap between government spending and revenues.
The move strips the U.S. of its last remaining triple-A credit rating from a major ratings firm, following similar cuts by Fitch Ratings in 2023 and S&P Global Ratings in 2011. Moody’s downgraded the U.S. to Aa1, a rating also held by Austria and Finland.
“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s wrote in a statement.
Kush Desai, a spokesman for the White House, blamed the Biden administration for adding to the nation’s debt and criticized Moody’s for the timing of its downgrade.
“The Trump administration and Republicans are focused on fixing [former President Joe] Biden’s mess,” he said. “If Moody’s had any credibility, they would not have stayed silent as the fiscal disaster of the past four years unfolded.”
The Moody’s downgrade comes as Republicans in Congress are trying to fashion a giant tax-and-spending bill that would extend expiring tax cuts, add some new tax cuts, reduce spending on Medicaid and nutrition assistance and boost border enforcement and national defense. It is expected to increase budget deficits by about $3 trillion over the next decade, compared with a scenario where the tax cuts expire as scheduled Dec. 31.
House Republican spending hawks blocked the bill on Friday, trying to accelerate spending cuts and hasten the end of clean-energy tax breaks.
At the margin, the Moody’s downgrade could put pressure on the market for U.S. Treasurys, which has already been hit by expectations for greater borrowing and stubbornly high inflation.
Treasurys, however, rallied after S&P’s 2011 downgrade, in part because the economy was weak, demonstrating that investors still considered the U.S. the world’s safest bet. Few expect the Moody’s downgrade to spur market turmoil this time. The U.S. remains the world’s largest economy and the benchmark against which other countries are measured.
But some investors said the downgrade could exacerbate the damage the recent trade war has done to that exceptional position. And that might compel global investors to lift the premium they demand to buy U.S. debt, which could drive benchmark yields beyond their recent level around 4.5%, likely stressing growth and market sentiment.
“That could generate an even bigger deficit because the cost of servicing our debt would also go up,” said Michael Goosay, global head of fixed income at Principal Asset Management.
In explaining the downgrade, Moody’s focused almost exclusively on the U.S. fiscal position, playing down other issues such as President Trump’s criticism of Federal Reserve Chair Jerome Powell, which has raised questions about the central bank’s ability to maintain its independence.
“While recent months have been characterized by a degree of policy uncertainty, we expect that the U.S. will continue its long history of very effective monetary policy led by an independent Federal Reserve,” Moody’s wrote.
While institutional arrangements, such as separation of powers, “can be tested at times, we expect them to remain strong and resilient,” the statement read.
For years the U.S. was one of a select group of nations rated triple-A by Moody’s, but the rise of debt levels around the world has pared that figure to 11.
Moody’s shifted its outlook on U.S. debt to stable, noting the nation “retains exceptional credit strength such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency.”
Top lawmakers quickly issued statements responding to the downgrade.
“This downgrade is a direct warning: our fiscal outlook is deteriorating, and House Republicans are determined to make it worse,” said Rep. Brendan Boyle (D., Pa.), the top Democrat on the House Budget Committee. “The question is whether Republicans are ready to wake up to the damage they’re causing.”
Rep. French Hill (R., Ark.), chairman of the House Financial Services Committee, said that the downgrade was “a strong reminder that our nation’s fiscal house is not in order.” House Republicans, he said, “are committed to taking steps to restore fiscal stability, address the structural drivers of our debt, and foster a pro-growth economic environment.”