Moody’s Cuts US Credit Rating From Aaa To Aa1: What Does It Signal?

SOURCE : NEW18 NEWS

Last Updated:May 17, 2025, 09:57 IST

Moody’s Ratings has downgraded the US government’s credit rating from the highest Aaa to Aa1, citing growing fiscal challenges and political gridlock.

Moody’s Ratings has downgraded the US government’s credit rating from the highest Aaa to Aa1, citing growing fiscal challenges and political gridlock. The agency pointed to successive administrations’ inability to control rising deficits and debt, despite the US retaining what it called “exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency”.

Moody’s is the last of the three major credit rating agencies to downgrade US federal debt. Standard & Poor’s made its cut in 2011, while Fitch Ratings followed in 2023.

The downgrade comes amid mounting concerns over the federal government’s finances. Moody’s projects that federal deficits will widen from 6.4 per cent of GDP in 2024 to nearly 9 per cent by 2035. The debt-to-GDP ratio is expected to surge from 98 per cent in 2024 to 134 per cent by 2035, with interest payments alone possibly consuming 30 per cent of federal revenue by that time — up from 18 per cent in 2024.

“We expect federal deficits to widen, reaching nearly 9 per cent of (the US economy) by 2035, up from 6.4 per cent in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation,” Moody’s said in a statement.

The agency also flagged the potential extension of the 2017 Trump-era tax cuts — backed by the Republican-controlled Congress — as a major risk to fiscal stability. Moody’s warned that such an extension “would add $4 trillion over the next decade to the federal primary deficit (which does not include interest payments)”.

Partisan gridlock has hampered efforts to address the fiscal imbalance. Republicans oppose tax increases, while Democrats are unwilling to slash spending. Just on Friday, House Republicans failed to push a package of tax breaks and spending cuts through the Budget Committee, as some hard-right members demanded deeper cuts to Medicaid and President Biden’s green energy tax incentives. All Democrats opposed the bill.

Despite the downgrade, Moody’s maintained a stable outlook for the US, citing its enduring economic strengths. “Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions,” the agency stated. “Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.”

With a GDP per capita of $85,812 in 2024 and the dollar’s continued dominance as the world’s reserve currency, the US still holds substantial financial firepower. However, the Aa1 rating reflects a clear signal of concern over the long-term fiscal path and policy unpredictability.

What Does It Mean?

The downgrade from Aaa to Aa1 is a signal that Moody’s sees increased long-term risks in the US government’s ability to manage its finances. It reflects growing concern over:

Ballooning deficits and debt: Federal deficits are set to reach nearly 9% of GDP by 2035, with debt soaring to 134% of GDP.

Rising interest burdens: A larger share of government revenue will be consumed by interest payments, squeezing funds for other priorities.

Policy inaction: A politically divided Congress has failed to agree on meaningful reforms to reduce the deficit.

Extension of tax cuts: Maintaining the 2017 tax cuts could add $4 trillion to deficits over the next decade.

“While this downgrade doesn’t immediately impact the US’s ability to borrow, it could raise long-term borrowing costs and erode investor confidence if fiscal reforms continue to stall. It also marks a reputational blow for the world’s largest economy at a time of rising global economic uncertainty,” according to an economist, who did not want to be named.

White House Dismisses Moody’s Downgrade

The White House on Friday dismissed the decision by Moody’s Ratings to lower the US credit rating, calling it a political decision.

Steven Cheung, a spokesman for President Donald Trump, in a post on X singled out Mark Zandi, an economist for Moody’s Analytics, accusing him of being a long-time critic of the administration’s policies.

“Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again,” Cheung said. Moody’s Ratings is a separate group from Moody’s Analytics.

First Published:

May 17, 2025, 09:48 IST