Moody’s Downgrades US Credit Rating Amid Soaring Debt and Fiscal Standoff

Moody’s Ratings has lowered the United States’ long-term credit score from Aaa to Aa1, marking the country’s final removal from the highest-tier sovereign credit rating among major rating agencies. The downgrade reflects deepening concerns about the nation’s growing debt burden and persistent structural fiscal imbalances, which Moody’s said are heading in a direction that lacks sustainability.

This action aligns Moody’s with S&P and Fitch, which previously downgraded U.S. government debt in 2011 and 2023, respectively. All three of the major credit rating firms now assess U.S. sovereign bonds at a level below their top rating, highlighting a broader shift in how the global financial community views America’s long-term fiscal outlook.

While Moody’s acknowledged the enduring strength of the U.S. economy, its vast and liquid capital markets, and the continued dominance of the U.S. dollar in global trade and finance, it concluded that these strengths are no longer sufficient to fully counterbalance the growing weaknesses in public finance. Alongside the downgrade, Moody’s revised the outlook on the rating to stable, suggesting that further reductions are not anticipated in the near term.

Deficit Trends and Structural Drivers of the Downgrade

In its detailed assessment, Moody’s pointed to the prolonged failure of the executive and legislative branches to implement fiscal reforms. The agency highlighted the ongoing trend of large, annual federal deficits, fueled by a lack of long-term budgetary planning and political gridlock.

Current projections show the federal deficit expanding from 6.4 percent of GDP in 2024 to nearly 9 percent by 2035. This increase is expected to result from growing interest obligations, rising costs associated with entitlement programs, and insufficient revenue growth. If left unaddressed, the federal debt is anticipated to climb to 134 percent of GDP by 2035, up from an estimated 98 percent today—a trajectory that would rival post-World War II debt levels.

One major fiscal policy under scrutiny is the proposed extension of the 2017 Tax Cuts and Jobs Act, which remains a central focus of the Republican-led Congress and former President Donald Trump. According to Moody’s estimates, maintaining these tax reductions would add roughly $4 trillion to the federal primary deficit over the coming decade. This, the agency warned, would further constrain fiscal flexibility and reduce the government’s ability to manage economic shocks.

By 2035, mandatory expenditures—comprising programs such as Medicare, Social Security, and interest payments—are projected to consume close to 78 percent of total federal spending, up from 73 percent today. Interest expenses alone are expected to absorb 30 percent of all federal revenue by then, a significant rise from 18 percent in 2024 and just 9 percent in 2021.

Market Impact and Political Implications

Though anticipated by some analysts, the downgrade had a measurable, if limited, effect on financial markets. Yields on 10-year Treasury bonds increased to approximately 4.49 percent in after-hours trading, while exchange-traded funds focused on long-term government bonds declined by about 1 percent. Broader equity indices also registered slight declines, with the S&P 500 ETF falling 0.4 percent post-market.

Financial experts suggested the change could marginally raise government borrowing costs, as some investors may demand higher returns for U.S. debt. However, others emphasized that the downgrade’s symbolic nature may limit its immediate impact, given the entrenched global reliance on the U.S. dollar and Treasury securities.

Nevertheless, the announcement comes amid intensifying political divisions in Washington. The downgrade followed the failure of a major tax and spending proposal in the House Budget Committee, which aimed to extend the 2017 tax cuts. The bill stalled due to disagreements within the Republican Party, with fiscal conservatives pushing for deeper expenditure reductions.

Broader Warnings and Institutional Stability

The downgrade has rekindled debates about whether the U.S. is drifting away from fiscal discipline. Treasury Secretary Scott Bessent recently cautioned lawmakers that the nation’s current fiscal path was untenable and warned of the risk of a credit-driven economic disruption.

Moody’s reaffirmed its confidence in key institutional pillars such as the Federal Reserve and the U.S. constitutional system. These, it said, remain essential buffers against instability. Yet the agency also noted that rising political dysfunction is impeding the policymaking process and complicating efforts to address long-term fiscal issues.

The agency warned that without bipartisan cooperation on deficit control and revenue strategies, the fiscal outlook will likely continue to deteriorate. Analysts also flagged risks tied to the growing dependence on foreign capital to finance government borrowing, as well as weakening demand for U.S. debt amid global geopolitical tensions. Should investor confidence in U.S. fiscal management falter, the repercussions could be swift and severe.

While Moody’s retains a stable outlook on the revised rating, it left open the possibility of future changes. A credible plan to manage debt and restore fiscal discipline could reverse the downgrade over time. Conversely, any rapid deterioration in fiscal indicators or loss of policy credibility could result in additional downgrades.

In the absence of corrective action, the rating downgrade serves as a clear signal: the United States can no longer rely solely on its historical financial reputation to maintain the highest level of creditworthiness in global markets. The sustainability of its fiscal position now hinges on politically difficult decisions that have long been deferred.