Ratings agency Moody’s has downgraded the United States’ credit rating from Aaa to Aa1, citing concerns over the nation’s growing debt, which has now reached a staggering $36 trillion.
The move comes as Republicans and the Senate seek to approve a sweeping package of tax cuts, spending hikes and safety-net reductions, which could add trillions to the US debt pile.
The downgrade risks reinforcing Wall Street’s growing worries over the US bond market as US politicians are stuck debating on unfunded tax cuts, which could potentially impact the economy and the US stock market.
A Wake-Up Call From Moody’s
Why the downgrade? Moody’s stated that an increase in federal budget deficit is expected to reach almost 9% of the GDP by 2035. Moody’s also showed successive administrations’ failure to reduce deficits, driven by rising interest payments, entitlement spending, and low revenue generation. ⁽¹⁾
Concerns rose regarding the sustainability of US fiscal policies. Moody’s has now downgraded to Aa1, matching the downgrades of Standard & Poor’s in 2011 and Fitch’s in 2023. ⁽²⁾
Fiscal Challenges and Political Setback
As a result of rising interest rates and more borrowing, the US is facing a budget deficit of about $2 trillion per year, or more than 6% of GDP. Moody’s warned that extending the 2017 Tax Cuts and Jobs Act, as anticipated, could add $4 trillion to the deficit over the next decade. ⁽³⁾
The US House Budget Committee narrowly approved President Donald Trump’s expansive tax and immigration bill, known as the “One Big Beautiful Bill Act.” The 17–16 vote followed negotiations with four fiscally conservative Republicans who had previously opposed the bill due to concerns over its impact on budget deficits. ⁽⁴⁾
US Dollar Declines Despite Rising Treasury Yields
The downgrade has triggered concerns in the US bond market, pushing Treasury yields higher. 10-year Treasury yields rose three basis points to 4.50%, while 30-year yields rose to 5% on Monday, which reached 2023 levels, when they peaked at 5.18%, the highest since 2007.
Higher interest rates, along rising treasury yields could pressure the government’s fiscal policy. Higher yields also threaten the economy by pushing interest rates up for consumers, thereby impacting mortgages and other types of loans. ⁽⁵⁾
The US dollar index declined 0.63%, reaching a one-week low at 100.275 as markets reacted to the downgrade and as trade deal concerns weighed on sentiment.
Investor confidence in US financial assets has been on the decline this year due to President Trump’s aggressive trade policies.
Administration Response
In an interview with NBC, US Treasury Secretary Scott Bessent criticized the downgrading and referred to Moody’s as a “lagging indicator.” According to Bessent, the Trump administration’s priorities are expanding the economy and cutting federal spending. ⁽⁶⁾
Looking Ahead
Moody’s downgrade could be challenging for US fiscal policy, with rising deficits, debt levels, and interest costs which could threaten the US economic.
Major agencies continue to rank the US as having the second-highest credit rating. The downgrade might, however, raise the risks associated with US debt, which would have a significant effect on US assets, particularly stocks. ⁽⁷⁾
As Treasury yields climb and the dollar weakens, policymakers face mounting pressure to address the deficit while navigating political divisions and global trade uncertainties.
