Moody lowers U.S. credit rating to AA1 amid rising debt and fiscal deficits | Economic News
New Delhi: Moody’s ratings have lowered the U.S. long-term issuer and senior unsecured rating from AAA to AAA. The downgrade marks a number one downgrade on Moody’s 21-point rating scale, due to concerns about rising federal debt and interest payments, which have seen a significant increase in debt and interest payments over the past decade.
The rating agency said the move reflects a continuous continuous failure of the U.S. government and Congress to agree to measures that could reverse the huge and ongoing fiscal deficit trend.
“The continuous U.S. government and Congress failed to reach a consensus on a trend to reverse large annual fiscal deficits and growing interest costs. We believe that in the fiscal proposal currently under consideration, material reductions in mandatory spending and deficits will result.”
It noted that the U.S. federal government spends more, while revenues have fallen due to tax cuts. This combination leads to a growing deficit and debt level. Moody’s said it expects the U.S. to continue to encounter large fiscal deficits over the next decade, especially as rights spending increases, revenue growth remains flat. As Moody’s assumed, if the 2017 Tax Cut and Jobs Act is extended, the estimated $4 trillion could be increased to the major federal deficit (excluding interest payments) over the next decade.
By 2035, mandatory spending, including interest, is expected to account for 78% of total federal spending, up from 73% in 2024. But despite the downgrade, Moody’s specifies a stable outlook and balances it with equilibrium risk at the AA1 level. It acknowledges several credit advantages that support the U.S. economy, such as its strong track record of large size, resilience, high average income and innovation.
The agency also noted that the dollar’s role as the world’s dominant reserve currency, despite its high deficit, gives the government strong financing capacity. Moody’s believes that the United States will maintain its institutional advantages, including a constitutional separation of powers and an effective independent monetary policy led by the Federal Reserve.
Moody’s said returning fiscal discipline by increasing revenue or reducing spending could lead to rating escalation. On the other hand, debt indicators are faster than expected, or a sudden loss of confidence in the US dollar may trigger another downgrade. However, the agency believes this is unlikely, as there are currently no reliable alternatives to the US dollar as a global reserve currency.
