Analyzing Moody's Recent Downgrade of the US Credit Rating

What Has Moody’s Done to the US Credit Rating?

Moody’s has downgraded the United States’ long-term issuer and senior unsecured debt rating from Aaa to Aa1, altering the outlook from stable to negative. This one-notch downgrade stems from concerns regarding fiscal deterioration and governance.

What Are the Main Reasons Behind the Downgrade?

Moody’s identified several key factors contributing to this downgrade:

• Rising government debt and interest burdens
• Weak fiscal performance compared to peers
• Increased entitlement spending
• Inadequate policy measures by successive administrations and Congress to address structural deficits
• Declining consumer sentiment and inflation expectations

How Does This Downgrade Affect the US Economy?

The downgrade could have several significant implications for the US economy:

• It may raise borrowing costs for the US government due to perceived increased risk.
• It is projected to add approximately $4 trillion to the federal fiscal primary deficit (excluding interest) over the next decade.
• The debt burden could rise to 134% of GDP by 2035, compared to 98% in 2024.
• Investor confidence might wane, although US Treasuries remain widely held due to the dollar’s global status.

Will It Lead to Panic on Wall Street?

Unlikely. Wall Street is expected to maintain stability for several reasons:

• Many global investors still regard US assets as safe, thanks to the dollar’s dominance.
• The downgrade had been anticipated given the fiscal situation.
• No immediate liquidity or solvency crisis is currently evident.

How Is US Fiscal Policy Contributing to the Downgrade?

Federal spending has escalated due to:

• Entitlement programs like Social Security and Medicare.
• Interest payments on increasing debt.
• Limited progress on tax or spending reforms.

Moody’s noted that without reforms, interest costs alone could soar to 30% of revenue by 2035, up from 9% in 2021.

What Does the Downgrade Say About Governance in the US?

Moody’s criticized the political gridlock, emphasizing that the inability of Congress and successive presidents to implement medium-term reforms in tax and spending has diminished confidence in US fiscal governance.

Is the US Still Economically Strong Despite the Downgrade?

Yes, Moody’s acknowledged that the US retains notable credit strengths, including:

• A large and resilient economy
• The US dollar’s status as the world’s primary reserve currency
• Institutional capacity such as the Federal Reserve

However, it warned that these strengths may not fully offset the growing fiscal stress.