(Reuters) – Moody’s on Friday cut the U.S. credit rating by one notch, citing rising debt and interest payments that outpace those of similarly rated sovereigns, in a move that marks the end of an era as Moody’s was the last major agency to maintain a triple-A rating for U.S. sovereign debt.
The downgrade to “Aa1” from “Aaa” follows a change in the outlook on the sovereign in 2023 due to wider fiscal deficit and higher interest payments, and comes as the U.S. Congress debates tax and spending plans that could deepen the U.S. fiscal hole.
“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.”
Since his return to the White House on January 20, President Donald Trump has pledged to balance the U.S. budget while his Treasury Secretary, Scott Bessent, has repeatedly said the current administration aims to lower U.S. government funding costs.
The administration’s mix of revenue-generating tariffs and spending cuts through Elon Musk’s Department of Government Efficiency has highlighted a keen awareness of the risks posed by mounting government debt, which, if unchecked, could trigger a bond market rout and hinder the administration’s ability to pursue its agenda.
“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.”
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 said.
The Treasury Department did not immediately respond to a request for comment.
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 $36.2 trillion in 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.
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.
“The downgrade is a wake-up call for Republicans. They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory,” said Brian Bethune, Economics Professor at Boston College.
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.
(Reporting by Pushkala Aripaka in Bengaluru and Davide Barbuscia in New York; Additional reporting by Paritosh Bansal, Costas Pitas, Nupur Anand, Ross Kerber, Pete Schroeder.Editing by Shilpi Majumdar, Arun Koyyur, Megan Davies and Sandra Maler)