May 16 (Reuters) – Moody’s Investors Service cut the United States’ top-notch credit rating, a move that is going to potentially raise the cost of U.S. government borrowing and reverberate through financial markets all over the world.
Moody’s initially assigned the United States the top-rung “Aaa” rating in 1919 and is the last of the three major ratings firms to downgrade it.
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The cut on Friday by one notch to “Aa1” was a shift in the agency’s outlook for the sovereign in 2023 on the back of larger fiscal deficits and increased interest payments.
“Subsequent administrations and Congresses have not supported cuts to the trend in large annual deficits, the primary driver of rising debt and future interest costs,” Moody’s said on Friday, as it revised its outlook on the U.S. from “negative” to “stable.”
The announcement came under criticism by people close to Trump.
Stephen Moore, a former senior Trump economic adviser who is an economist with Heritage Foundation, called the move “outrageous”. If a US-supported bond is not a triple-a asset, then what is?” he told Reuters.
White House communications director Steven Cheung responded to the downgrade in a post on social media, criticizing Moody’s economist Mark Zandi. Zandi was, he said, a political opponent of Trump.
Zandi declined to comment. Zandi is the chief economist for Moody’s Analytics, an independent organization from the credit ratings agency Moody’s.
Since returning to the White House on January 20, Trump has said he would balance the budget, and his Treasury Secretary Scott Bessent has said the current administration wants to reduce the cost of the U.S. government’s funding.
But the administration’s efforts to raise revenues and control spending haven’t convinced investors yet.
The President has been ham fisted in his attempts to cut spending using Elon Musk’s Department of Government Efficiency, which has been something of a flop. And efforts to generate revenue through tariffs have raised fears of a trade war and global slowdown that spooked markets.
Unrestrained, such concerns could unleash a bond market rout and crimp the administration’s ability to advance its program.
The downgrade, which was announced after the close of trade on Friday, pushed up the yields of Treasury bonds, and analysts said it might make investors hesitate when markets reopen for regular trading on Monday.
“It’s basically saying this is more evidence that the United States has got too much debt,” said Darrell Duffie, a finance professor at Stanford and a former board member at Moody’s. “Congress will just have to discipline itself, either more revenues or less spending.”
Focus on Deficits
Trump to push lawmakers in the Republican-controlled Congress to pass legislation that would extend his signature first-term legislative achievement, the 2017 tax cuts, which, nonpartisan analysts say, will add trillions to the federal government’s debt.
The downgrade also came after the tax bill stalled on a technicality on Friday after hardline Republicans in the Senate sought deeper permanent tax breaks for businesses and were seeking other changes, leaving Congress at odds over how to avoid triggering across-the-board spending cuts.
Moody’s said the fiscal proposals in consideration were not likely to result in a multi-year reduction in deficits and estimated the federal debt burden would reach about 134 percent of G.D.P. in 2035, compared with 98 percent in 2024.
“Moody’s credit downgrade of the United States should be a sobering reminder to Congressional Republicans and the President of what’s at stake if they continue their reckless effort to keep the deficit exploding in order to finance tax cuts for the wealthy,” Senate Democratic Leader Chuck Schumer said in a statement on Friday. “Unfortunately, I am not holding my breath.”
The downgrade by rival Fitch, which cut the U.S. sovereign rating one notch in August 2023, too, came as it cited the expected fiscal deterioration and repeated last-minute debt ceiling negotiations that put at risk the government’s ability to pay its bills.
Fitch was the second big rating agency to remove the United States of its top triple-A rating, after the action taken by Standard & Poor’s after the 2011 debt ceiling crisis.
“They have got to come up with a credible budget agreement that’s going to move the deficit down,” said Brian Bethune, an economics professor at Boston College, referring to Republican lawmakers.
Market Fragility
Credit ratings are used by investors to determine the worthiness of companies and governments to raise financing in debt capital markets. As a rule, the lower a borrower’s rating, the more it spends on financing.
“The downgrade of the U.S. credit rating by Moody’s is just the latest act in a long play of fiscal irresponsibility that will inevitably result in higher borrowing rates both for the United States government as well as consumers and businesses in the U.S.,” Spencer Hakimian, chief executive of hedge fund Tolou Capital Management, said.
Long-dated Treasury yields – which move inversely to bond prices – may move higher as a result of the downgrade, Hakimian said, unless news on the economic front increases safe-haven demand for U.S. government debt.
The downgrade came as there has been increased uncertainty in financial markets in the United States as Trump’s brinkmanship with tariffs on the nation’s key trading partners and fears of a return to price pressures and a severe slowdown in the economy took hold in the past few weeks.
“This news is coming at a time the markets are very fragile so there will likely be 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 and Pete Schroeder; Editing by Shilpi Majumdar, Arun Koyyur, Megan Davies and Sandra Maler.
