The recent downgrade of the U.S. credit rating from Moody's marks a significant shift, moving from the highest rating to one notch below. This decision comes on the heels of a setback for the president's budget bill in Congress, reflecting a growing concern about the nation's fiscal health. The package, known as the One Big Beautiful Bill Act, faced opposition from Republican budget hawks who joined Democrats to block it earlier on Friday.
In a statement, Moody’s acknowledged the U.S.'s robust economic and financial strengths but indicated that these factors no longer sufficiently counterbalance the ongoing decline in fiscal metrics. “While we recognize the U.S.’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” the agency explained regarding the downgrade.
It is crucial to note that the U.S. credit rating has faced downgrades from other major credit agencies in previous years, including Fitch Ratings and S&P Global Ratings. The implications of a lower credit rating can be far-reaching, potentially leading to increased borrowing costs and a diminished fiscal outlook.
Spokesman Kush Desai for the Trump administration criticized Moody’s decision, stating, “The Trump administration and Republicans are focused on fixing Biden’s mess by slashing the waste, fraud, and abuse in government and passing The One, Big, Beautiful Bill to get our house back in order.” He further argued that if Moody’s had credibility, they would have recognized the fiscal issues that have unfolded over the past four years.
The U.S. is grappling with a massive debt burden that continues to escalate as interest accumulates and the federal government persists in borrowing. The downgrade from Moody’s coincides with revelations that the Republican tax proposal emerging in the House could add over $2.5 trillion to the federal deficit over the next decade, according to nonpartisan estimates and budget experts.
While the proposed legislation is expected to undergo significant revisions before its final passage, the draft plan from the House Ways and Means Committee outlines approximately $3.8 trillion in tax cuts over the next ten years. According to the Joint Committee on Taxation, a nonpartisan congressional body, this would contribute to a total bill cost potentially exceeding $2.5 trillion—and possibly reaching as high as $3.3 trillion when factoring in interest on new debt, as noted by Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget.
Moody’s forecasts indicate that federal deficits could escalate to 9 percent of the country’s gross domestic product (GDP) by 2035, up from 6.4 percent last year. This anticipated growth in deficits is attributed to rising interest payments, low revenue, and government spending on programs like Social Security and Medicare.
The Trump administration has committed to reducing spending by cutting programs and decreasing the federal workforce, efforts partially managed by the U.S. DOGE Service, which is overseen by billionaire Elon Musk. Despite these attempts, the federal debt continues its upward trajectory.
Senate Democratic Leader Charles E. Schumer expressed concern regarding the downgraded credit rating, labeling it a “wake-up call to Trump and Congressional Republicans to end their reckless pursuit of their deficit-busting tax giveaway.” This situation draws parallels to past events, such as the actions taken by newly elected British Prime Minister Liz Truss, who faced a similar backlash after implementing aggressive economic policies that led to a downgrade of her country’s economic outlook.
The potential ramifications of a lower credit rating could lead to higher borrowing costs, undermining confidence in the U.S.'s ability or willingness to repay its debts. However, it is essential to note that the U.S. dollar remains the world’s reserve currency, and investors typically turn to U.S. treasuries in times of economic uncertainty.
Despite the downgrade, Moody’s provided a somewhat optimistic outlook, maintaining a “stable” assessment of the government’s creditworthiness. The agency acknowledged the U.S.’s “exceptional credit strengths,” including the size, resilience, and dynamism of its economy, alongside the enduring role of the U.S. dollar as a global reserve currency.
