MOODY'S downgraded the U.S. sovereign credit rating on Friday due to concerns about the sustainability of its growing, US$36 trillion debt pile, in a surprise move that could complicate President Donald Trump's efforts to cut taxes and send ripples through global markets.
Reuters reported today that Moody's, the last of the three major credit agencies that maintained the top triple-A rating for America, downgraded it by one notch to "Aa1." The cut from "Aaa" follows a change in 2023 in its outlook on the sovereign due to wider fiscal deficits and higher interest payments.
"Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said on Friday, as it changed its outlook on the U.S. to "stable" from "negative."
Stephen Moore, former senior economic advisor to Trump and an economist at Heritage Foundation, however, called the move "outrageous".
"If a US backed government bond isn't triple A-asset then what is?" he told Reuters.
White House communications director Steven Cheung reacted to the downgrade via a social media post, singling out Moody's economist, Mark Zandi, for criticism. He called Zandi a political opponent of U.S. President Donald Trump.
"Nobody takes his 'analysis' seriously. He has been proven wrong time and time again," said Cheung.
The Treasury Department did not immediately respond to a request for comment.
Since his return to the White House on January 20, Trump has said he would balance the budget while his Treasury Secretary, Scott Bessent, has repeatedly said the current administration aims to lower U.S. government funding costs.
But the administration's attempts to raise revenue and cut spending have so far failed to persuade investors. Trump's attempts to cut spending through Elon Musk's Department of Government Efficiency have fallen far short of its initial goals. And attempts to raise revenue through tariffs have sparked concerns about a trade war and global slowdown, roiling markets.
Left unchecked, such worries could trigger a bond market rout and hinder the administration's ability to pursue its agenda.
The downgrade, which came after market close, sent yields on Treasury bonds higher, and analysts said it could give investors a pause when markets re-open for regular trading on Monday.
"Very surprising. This is big -- markets were not expecting this at all," said Tom Di Galoma, managing director of rates and trading at Mischler Financial in Utah.
Focus On Deficits
Trump is pushing lawmakers in the Republican-controlled Congress to pass a bill extending the 2017 tax cuts that were his signature first-term legislative achievement, a move that nonpartisan analysts say will add trillions to the federal government's debt.
The downgrade came as the 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.
Moody's said the fiscal proposals under considerations were unlikely to lead to a sustained, multi-year reduction in deficits, and it estimated the federal debt burden would rise to about 134% of GDP by 2035, compared with 98% in 2024.
"Moody's downgrade of the United States' credit rating should be a wake-up call to Trump and Congressional Republicans to end their reckless pursuit of their deficit-busting tax giveaway," Senate Democratic Leader Chuck Schumer said in a statement on Friday. "Sadly, I am not holding my breath."
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.
Fitch was the second major rating agency to strip the United States of its top triple-A rating, after Standard & Poor's did so after the 2011 debt ceiling crisis.
"They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory," said Brian Bethune, an economics professor at Boston College, referring to Republican lawmakers.
Market Fragility
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.
"The downgrade of the US credit rating by Moody's is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States," said Spencer Hakimian, chief executive at Tolou Capital Management, a hedge fund.
Long-dated Treasury yields - which rise when bond prices decline - could go higher on the back of the downgrade, said Hakimian, barring news on the economic front that could increase safe-haven demand for Treasuries.
The downgrade follows heightened uncertainty in U.S. financial markets as Trump's decision to impose tariffs on key trade partners has over the past few weeks sparked investor fears of higher price pressures and a sharp economic slowdown.
"This news comes at a time when the markets are very vulnerable and so we are likely to see a reaction," said Jay Hatfield, CEO at Infrastructure Capital Advisors. - May 17, 2025
