Moody’s Ratings announced on Friday a downgrade of the U.S. credit rating by one notch, citing ongoing fiscal deficits expected to worsen. The rating was reduced from Aaa to Aa1 on Moody’s 21-notch scale, with the outlook adjusted from negative to stable.
Moody’s explained that the downgrade reflects an increase over more than a decade in government debt and interest payment ratios, now significantly higher than those of similarly rated sovereigns. The firm criticized successive U.S. administrations and Congress for failing to agree on measures to reverse large annual fiscal deficits and growing interest costs. They expressed skepticism about current fiscal proposals resulting in significant multi-year reductions in mandatory spending and deficits.
The firm’s analysis points to a worsening fiscal outlook due to rising entitlement program spending and increased interest payments amid an aging U.S. population and higher interest rates. They anticipate larger deficits over the next decade as entitlement spending grows while government revenue remains largely unchanged, leading to increased government debt and interest burdens.
Despite this downgrade, Moody’s adjusted the outlook to stable, indicating balanced risks at the Aa1 tier. They acknowledged the U.S.’s exceptional credit strengths, including its large, resilient economy and the global reserve currency status of the U.S. dollar, alongside a history of effective monetary policy led by an independent Federal Reserve.
This downgrade follows a similar one by Fitch in August 2023, which also cited expected fiscal deterioration and contentious debt ceiling negotiations. The move coincides with a setback for President Donald Trump, whose tax bill failed to advance due to demands for deeper spending cuts by hardline Republicans.
Reuters contributed to this report.
