The U.S. credit rating was downgraded by Moody’s Ratings on Friday, as it was an indication of investor concern regarding increasing government debt.
The downgrade of the highest rating of Aaa to Aa1 “reflects the rise over more than a decade in government debt and interest payment ratios to levels decisively higher than those of similarly rated sovereigns,” the credit rating firm said in a statement on Friday.
“Later administrations and Congresses in the U.S. have not come together to enact steps to stem the tide of enormous annual budget deficits and increasing interest costs,” Moody’s also added.
Moody’s also referred to the recent policy uncertainty in the U.S. generated by Mr. Trump’s changing trade policies.
Moody’s is the third and last of the big credit rating agencies to downgrade U.S. government bonds. Standard and Poor’s downgraded the U.S. from AAA to AA+ in August 2011, and in August 2023 Fitch Ratings lowered the credit rating one notch from AAA to AA+.
Moody’s stated that it expects federal deficits to increase from 6.4% of GDP in 2024 to 9% of GDP in 2035 because of “rising interest payments on debt, rising entitlement spending and relatively low revenue generation.”.
Credit downgrade resulted after House Budget Committee on Friday blocked President Trump’s domestic policy bill, which would have extended tax cuts in his first term.
If the 2017 Tax Cuts and Job Act is allowed to expire, it would increase the federal primary deficit (not counting interest payments) by $4 trillion over the course of a decade, Moody’s said Friday.
The Congressional Budget Office foresees government-held public debt rising to 118% of GDP in 2035 from 100% today. That would be higher than a previous record of 106% in 1946. Despite the downgrade in debt, Moody’s shifted its outlook for the U.S. from negative to stable. The credit rating agency stated the U.S. “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the continued role of the U.S. dollar as global reserve currency.”
Another benefit is the country’s record of “very effective monetary policy driven by an independent Federal Reserve,” Moody’s said.