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Moody’s Ratings on Friday announced that it downgraded the U.S. credit rating by one notch due to persistent fiscal deficits that it sees as likely to deteriorate in the future.
The downgrade moves the U.S. credit rating down one notch from Aaa to Aa1 on Moody’s 21-notch rating scale. The firm also changed its outlook for the U.S. from negative to stable.
Moody’s said that the downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
The downgrade moves the U.S. credit rating down one notch from Aaa to Aa1 on Moody’s 21-notch rating scale. (Reuters/Kevin Lamarque / Reuters)
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“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,” the firm explained. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Moody’s said that a worsening fiscal outlook and lack of will to stabilize the deficit led to the decision. (SAUL LOEB/AFP via Getty Images / Getty Images)
Moody’s added that it sees the federal government’s fiscal outlook worsening in the years ahead, with spending on entitlement programs like Medicare and Social Security continuing to rise amid the aging of the U.S. population and interest payments on the debt rising due to higher interest rates and widening deficits.
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“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The U.S.’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns,” Moody’s said.
The Department of the Treasury building is seen in Washington, D.C., on Aug. 29, 2022. ((Photo by DANIEL SLIM/AFP via Getty Images) / Getty Images)
While it downgraded the U.S. credit rating by one rung, Moody’s also changed its outlook from “negative” to “stable” in conjunction with the move, explaining that it reflects “balanced risks” at the Aa1 tier.
“The U.S. retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency,” the firm explained. “In addition, 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.”
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The downgrade comes as President Donald Trump’s sweeping tax bill failed to clear a key procedural hurdle on Friday, as hardline Republicans demanding deeper spending cuts blocked the measure in a rare political setback for the Republican president in Congress.
The cut follows a downgrade by rival Fitch, which in August 2023 also cut the U.S. sovereign rating by one notch, citing expected fiscal deterioration and repeated down-to-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.
Reuters contributed to this report
