The Blubber

On May 16, Moody’s Ratings downgraded the U.S. credit rating, citing the country’s failure to address its growing and substantial deficits. This marks the first time that all three major credit rating agencies have downgraded the U.S. credit below their highest rating. The downgrade comes as lawmakers are debating budget reconciliation measures that could further worsen the nation’s fiscal situation.

Moody’s revised the U.S. credit rating from its top Aaa (negative) rating to Aa1 (stable). In its announcement, Moody’s highlighted the following key reasons for the downgrade:

• The increasing national debt, driven by higher federal spending and lower tax revenue resulting from tax cuts. Moody’s notes that the extension of provisions from the 2017 Tax Cuts and Jobs Act (TCJA) could add $4 trillion to the debt over the next decade.
• Growing federal interest payments due to rising interest rates. The cost of servicing U.S. debt has surged, fueled by higher Treasury yields since 2021.

Moody’s further warned that “successive U.S. administrations and Congress have failed to reach agreements on measures to reverse the trend of large, annual fiscal deficits and growing interest costs. As a result, persistent and large fiscal deficits will continue to increase the government’s debt and interest burden. The U.S.’s fiscal performance is likely to deteriorate relative to its historical record and compared to other highly-rated sovereigns.”

The other two major credit rating agencies, Standard & Poor’s (S&P) and Fitch Ratings, have already downgraded the U.S. credit rating—S&P did so in 2011, and Fitch followed suit in August 2023.