The US was stripped of its last top credit rating by Moody’s Ratings, reflecting deepening concern that ballooning debt and deficits will damage America’s standing as the preeminent destination for global capital and increase the government’s borrowing costs.
Moody’s lowered the US credit score to Aa1 from Aaa on Friday, joining Fitch Ratings and S&P Global Ratings in grading the world’s biggest economy below the top, triple-A position. The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative. The credit assessor now has a stable outlook.
“While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.
Moody’s blamed successive administrations and Congress for swelling budget deficits that it said show little sign of abating. On Friday lawmakers in Washington continued to work towards a massive tax-and-spending bill that’s expected to add trillions to the federal debt over the coming years.
The White House on Friday cast the move as a political decision. Steven Cheung, a spokesman for President Donald Trump, singled out Mark Zandi, an economist for Moody’s Analytics, in a post on X, accusing him of being a long-time critic of the administration’s policies.
“Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again,” Cheung said. Moody’s Ratings is a separate group from Moody’s Analytics. Zandi did not immediately reply to a request for comment on Friday evening.
The reaction in major financial markets was swift in response to the decision, with Treasury yields on the 10-year note rising as high as 4.49%. An exchange-traded fund tracking the S&P 500 fell 0.6% in post-market trading.
“The downgrade may indicate that investors will demand higher yields on Treasuries,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. While US assets rallied in response to previous US downgrades from Fitch and S&P, “it remains to been seen whether the market reacts differently as the haven nature of Treasury and the US dollar might be somewhat uncertain.”
The shift comes at a time when the federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product. A weaker US economy in the wake of a global tariff war is set to increase the deficit as government spending typically rises when activity slows.
That outlook comes as the overall debt level for the US has already surpassed the size of the economy in the wake of profligate borrowing since Covid. Higher interest rates over the past several years have also pushed up the cost to service the government’s debt.
In May, US Treasury Secretary Scott Bessent, who has pointed to 10-year yields as a key metric, told lawmakers that the US was on an unsustainable trajectory: “The debt numbers are indeed scary,” and a crisis would involve “a sudden stop in the economy as credit would disappear,” he said. “I’m committed to that not happening.”
Lawmakers have been working to advance a tax package that includes an extension of provisions in the 2017 Tax Cuts and Jobs Act, amid doubt over slowing the pace of spending. The Joint Committee on Taxation had pegged the total cost of the bill at $3.8 trillion over the next decade, though other independent analysts have said it could cost much more if temporary provisions in the bill are extended.
A key House committee on Friday failed to advance House Republicans’ tax-and-spending bill, though, after hard-line conservatives bucked Trump and blocked the bill over cost concerns.
Joseph Lavorgna who worked at the White House National Economic Council in the first Trump administration, said the timing of the downgrade is “very strange,” given that Congress is in the midst of working that major bill. The 100% debt-to-GDP ratio is also “not unusual” in the world, said Lavorgna, who’s now SMBC Nikko Securities chief US economist.
The US is the fastest-growing industrialized nation and has the best productivity per capita, so the downgrade doesn’t make sense, he said.
Worrying Outlook
The US government is on track to surpass record debt levels set after World War II in just four years, reaching 107% of gross domestic product by 2029, the Congressional Budget Office warned in January.
That estimate doesn’t include the potential effect of a sweeping GOP tax cut that economists see adding trillions to government red ink over the coming decade. Over the long term, higher federal spending on Social Security and Medicare — a result of the aging population — are expected to add to federal debt over the coming decades, along with higher interest rates that have pushed up debt servicing costs.
The CBO said in March that the risk of a fiscal crisis “appears to be low,” but it’s not possible to reliably quantify the danger.
The rating company expects “federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.”
Moody’s identified higher Treasury yields as a factor hurting US fiscal sustainability. Yields between 4% and 5% are near levels that prevailed before 2007 and the financial crisis.
Path to Downgrade
The Moody’s downgrade has been in the works since November 2023, when the agency lowered the US rating outlook to negative from stable while affirming the nation’s rating at Aaa. Typically, such a change is followed with a rating action over the next 12 to 18 months.
The credit company is the last of three firms to ditch its top rating. Fitch Ratings downgraded the US in August 2023 by one level to AA+, citing concerns about political wrangling over the debt ceiling that took the nation to the brink of a default.
S&P Global Ratings was the first major credit grader to strip the US of its AAA rating back in 2011 and was harshly critiqued by the Treasury at the time.
--With assistance from Liz Capo McCormick, Edward Bolingbroke, Amanda Fung, Ye Xie, Anya Andrianova, Elena Popina and Jade Khatib.
