Moody’s Lowers US Rating: A Wake-up Call for Fiscal Policy

In a move that reverberated through global financial markets, Moody’s investors Service has downgraded the United States’ long-term credit rating from AAA to AA1. This decision, accompanied by a shift in outlook from negative to stable, marks the first time since 2011 that the US has been excluded from the top-tier rating by all major credit agencies. The downgrade reflects growing concerns about the nation’s fiscal health and the persistent inability of successive administrations to address structural weaknesses in the federal budget.

This action by Moody’s underscores the increasing anxiety surrounding the US’s long-term financial stability. The agency cited a “persistent and structural fiscal weakness” spanning over a decade as the primary driver behind the downgrade. This weakness is characterized by a growing debt burden and escalating interest payments relative to the nation’s Gross Domestic Product (GDP).

The numbers Don’t Lie: A Looming Fiscal Crisis?

moody’s projections paint a concerning picture of the US’s fiscal future. The agency forecasts the federal deficit to balloon to 9% of GDP by 2035, a significant jump from the 6.4% recorded in 2024. Concurrently, public debt is expected to surge from 98% of GDP in 2024 to a staggering 134% over the same period. The escalating cost of servicing this debt,fueled by rising interest rates,could consume as much as 30% of federal revenue.

To put this into viewpoint, consider the current state of US debt. As of early 2025,the national debt has already surpassed $35 trillion,a figure that continues to climb. This level of indebtedness raises serious questions about the long-term sustainability of the US economy.

moody’s analysis highlights a stark contrast between the US and other AAA-rated countries. In 2024, interest payments for the US government (federal, state, and local) accounted for 12% of revenue, compared to a mere 1.6% for other top-rated sovereign borrowers. This disparity underscores the severity of the US’s debt problem and its potential impact on future economic growth.

Tax Policy Under Scrutiny: The Ghost of 2017

Moody’s points to the ongoing political gridlock in Washington as a major impediment to fiscal reform. The agency specifically calls out the potential extension of the 2017 Tax Cuts and Jobs Act, championed by former President Donald Trump, as a significant contributor to the nation’s fiscal woes. Moody’s estimates that extending these tax cuts would add approximately $4 trillion to the primary deficit over the next decade.

The agency warns that without meaningful fiscal adjustments, budgetary adaptability will continue to erode. Mandatory spending, which includes interest payments, Social Security, and healthcare, already accounts for 73% of total federal expenditures. By 2035, this share could rise to 78%, further limiting the government’s ability to respond to unforeseen economic challenges or invest in critical areas such as infrastructure and education.

A Stable Outlook,But With Caveats

Despite the downgrade,Moody’s has assigned a “stable” outlook to the AA1 rating,indicating that the risks are currently balanced. This assessment is based on the inherent strengths of the US economy, including its size, resilience, innovative capacity, and the dollar’s status as the world’s dominant reserve currency.

Moody’s acknowledges that the dollar’s unique position provides the US with remarkable funding capacity, allowing it to finance large deficits and refinance debt at relatively low costs. While some central banks have explored diversification strategies, Moody’s believes that there is currently no viable choice to the dollar as the primary reserve currency.

The independence of the Federal Reserve is also viewed as a crucial factor in maintaining economic stability. Despite recent policy uncertainties, Moody’s expresses confidence in the Fed’s ability to manage economic cycles and liquidity crises effectively.

Geopolitical Headwinds: Trade Wars and Uncertainty

The downgrade comes at a notably sensitive time for the US economy, with the resurgence of protectionist trade policies adding to the uncertainty. The Trump administration’s reintroduction of tariffs on imports from China and other countries has already begun to impact manufacturing costs, growth estimates, and consumer spending.

While Moody’s does not directly attribute the downgrade to these tariffs, the agency acknowledges that GDP growth is highly likely to slow down in the short term as the economy adjusts to higher trade costs. Furthermore, the administration’s confrontational approach to international trade and multilateral institutions could erode global confidence in US institutional stability over time.

The Path Forward: Reforms or Further Decline?

Moody’s cautions that further deterioration in fiscal fundamentals could trigger another downgrade. This could be driven not only by rising debt levels but also by a decline in institutional effectiveness and governance, particularly in the event of political shocks or a loss of confidence in the dollar.

Conversely, the implementation of fiscal reforms aimed at improving long-term sustainability, such as tax increases, broadening the tax base, or structural spending cuts, could pave the way for a future upgrade. However, the current political climate makes comprehensive reforms unlikely. With a deeply divided Congress and a perpetual presidential campaign underway, bipartisan compromises appear increasingly elusive.

The window of chance for an orderly fiscal adjustment may be closing faster than markets and investors anticipate.

The End of an Era: The Loss of the Triple-A Rating

With this downgrade, Moody’s joins Standard & Poor’s (2011) and Fitch (2023) in stripping the US of its coveted AAA rating. While this decision may not trigger an immediate crisis of confidence,it serves as a stark warning about the long-term consequences of unsustainable fiscal policies.

It is not just numbers.It is indeed a matter of credibility, the ability of the political system to face long -term challenges.
Ben Bernanke, Former Fed president

In the short term, the Treasury market, still considered among the safest assets globally, may remain relatively stable. However, the loss of the top rating from all three major agencies raises a basic question: how long can the United States continue to live beyond its means without paying a higher price? This is a question that investors will increasingly ask themselves in the years to come.