Charles Esther
Moody’s downgraded the United States’ credit rating from Aaa, the highest possible, to Aa1.
This downgrade ended the last triple-A rating the US had after previous downgrades by other major agencies.
The credit ratings firm cited rising federal debt and increasing interest costs as key reasons for the downgrade.
Reasons Behind the Downgrade
Moody’s highlighted that successive US administrations and Congress have failed to take measures to reverse the growing trend of large annual fiscal deficits.
The statement added that current fiscal policies under consideration are unlikely to reduce spending or deficits.
Over the next decade, Moody’s expects larger deficits driven by rising entitlement spending, while government revenue is expected to remain broadly flat.
These persistent, large fiscal deficits will increase the government’s debt and interest burden.
According to Moody’s, the US fiscal performance will likely deteriorate both compared to its own past and relative to other highly rated sovereigns.
Change in Outlook from Negative to Stable
Despite the downgrade, Moody’s changed its outlook for the US from negative to stable.
This change reflects several “exceptional credit strengths,” including the size and resilience of the US economy.
The US dollar’s role as the global reserve currency was also cited as a key strength.
Institutional factors played a role in the stable outlook, such as the independent Federal Reserve’s monetary policies.
The constitutional separation of powers was also noted as a stabilizing factor.
While these institutional arrangements can be challenged at times, Moody’s expects them to remain strong and resilient.
Context of US Credit Ratings
Moody’s was the last major credit rating agency to hold a triple-A rating for the US.
Other agencies had downgraded the US earlier: Fitch Ratings downgraded it in 2023, and S&P Global Ratings did so in 2011.
Countries with Aaa ratings from Moody’s include the European Union, Canada, and Germany.
Other countries rated Aa1 include Austria and Finland.
National Debt and Political Response
The national debt of the United States has surpassed $36 trillion.
Former President Donald Trump has pledged to lower the national debt.
However, the challenges posed by growing entitlement costs and fiscal deficits remain significant.
