By IndraStra Business News Desk
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| Cover Image Attribute: Moody’s became the final of the three major credit rating agencies to lower the United States’ rating, after similar moves by S&P and Fitch. / Source: Angela Weiss, AFP |
On May 16, 2025, Moody’s Ratings downgraded the United States’ sovereign credit rating from Aaa to Aa1, stripping the nation of its last perfect credit score, a status it had held since 1919. This decision, driven by a ballooning $36 trillion national debt and persistent fiscal deficits, has sent ripples through financial markets and sparked heated political debate. The downgrade, coming hours after hardline Republicans blocked President Donald Trump’s tax bill over insufficient spending cuts, reflects a deeper crisis: America’s inability to reconcile its fiscal ambitions with economic reality. While the U.S. retains significant economic strengths, the path forward demands a sober reckoning with its debt burden, political gridlock, and the global implications of its fiscal choices.
Moody’s rationale for the downgrade is clear and sobering. The agency cited “the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.” Federal debt has surged to 98% of GDP in 2024, with projections estimating it will climb to 134% by 2035. Interest payments, which consumed 18% of federal revenue in 2024, are expected to devour 30% by 2035. This trajectory, Moody’s warns, is unsustainable without significant adjustments to taxation or spending. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency stated, pointing to a lack of political will to address the root causes of fiscal deterioration.
The downgrade follows similar moves by Fitch in 2023 and Standard & Poor’s in 2011, both of which cited fiscal mismanagement and political dysfunction. Fitch pointed to “expected fiscal deterioration” and “repeated down-to-the-wire debt ceiling negotiations,” while S&P highlighted “political brinksmanship” and governance that had become “less stable, less effective, and less predictable.” These critiques resonate today, as the U.S. approaches another debt ceiling deadline this summer. The unique U.S. debt ceiling mechanism, combined with partisan gridlock, has repeatedly brought the nation to the brink of default, eroding confidence in its fiscal stewardship.
President Trump’s response to the downgrade has been characteristically defiant. His administration, through White House spokesperson Kush Desai, dismissed Moody’s credibility, claiming, “If Moody’s had any credibility, they would not have stayed silent as the fiscal disaster of the past four years unfolded.” Communications director Steven Cheung took a more personal swipe, targeting Moody’s Analytics chief economist Mark Zandi, stating, “Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again.” Yet, Zandi works for a separate entity from the ratings agency, and such attacks do little to address the substantive concerns raised by Moody’s. Stephen Moore, a former Trump economic advisor, called the downgrade “outrageous,” arguing, “If a US backed government bond isn’t triple A-asset then what is?” This rhetorical flourish sidesteps the reality that even safe assets can become riskier when burdened by unchecked debt.
Trump’s fiscal agenda has only heightened these concerns. His push to extend the 2017 Tax Cuts and Jobs Act, a hallmark of his first term, is estimated to add $3.3 trillion to the debt over the next decade, according to the Committee for a Responsible Federal Budget. The proposed “One Big Beautiful Bill Act” would make these tax cuts permanent, eliminate taxes on tips and overtime income, boost defense spending, and fund border security measures. While it includes cuts to Medicaid and food stamps, the revenue loss from tax reductions far outweighs the savings, with annual deficits projected to rise from $1.8 trillion in 2024 to $2.9 trillion by 2034. Moody’s noted that “current fiscal proposals under consideration” are unlikely to yield “material multi-year reductions in mandatory spending and deficits,” a damning assessment of the administration’s approach.
The Republican-controlled Congress, however, is not fully aligned with Trump’s vision. On the same day as the downgrade, the House Budget Committee rejected the tax bill, with five of 21 Republicans voting against it. Hardline conservatives, led by figures like Representative Ralph Norman, demanded deeper cuts to Medicaid and the repeal of green energy tax credits. Norman defended his stance, signaling a broader tension within the party between fiscal hawks and those prioritizing tax cuts. Trump, frustrated by the setback, urged Republicans to “UNITE behind” the legislation, warning against “GRANDSTANDERS” in the party. The committee’s chairman, Jodey Arrington, scheduled a rare Sunday night session to salvage the bill, but the episode highlights the political obstacles to meaningful fiscal reform.
Efforts to curb spending have also fallen short. Trump’s Department of Government Efficiency (DOGE), led by Elon Musk, has resulted in thousands of federal layoffs and the gutting of the U.S. Agency for International Development. Yet, these measures have not significantly altered the government’s borrowing needs, as Moody’s observed. “It basically adds to the evidence that the United States has too much debt,” said Stanford finance professor Darrell Duffie, a former Moody’s board member. “Congress is just going to have to discipline itself, either get more revenues or spend less.” This sentiment is echoed by Boston College economics professor Brian Bethune, who stressed the need for “a credible budget agreement that puts the deficit on a downward trajectory.”
The market implications of the downgrade are uncertain but potentially significant. U.S. Treasury yields rose after the announcement, and analysts warn that further increases could follow when markets reopen. “This news comes at a time when the markets are very vulnerable and so we are likely to see a reaction,” said Jay Hatfield, CEO at Infrastructure Capital Advisors. Higher yields could raise borrowing costs for both the government and private sector, as Treasury rates influence everything from mortgage rates to corporate debt. Spencer Hakimian, chief executive at Tolou Capital Management, warned, “The downgrade of the US credit rating by Moody’s is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States.” For Americans already grappling with tariffs and inflation, this could translate into higher costs for homes, cars, and credit card debt.
Yet, some argue the downgrade’s immediate financial impact may be limited. A Barclays note suggested that banks’ risk-weighted capital calculations and collateral management practices are unlikely to change, as regulators and institutions like DTCC and CME do not differentiate between Aaa and Aa1 for U.S. Treasuries. The 2011 S&P downgrade caused a sharp but temporary stock market drop, and markets quickly recovered. Still, the broader context has shifted. Trump’s tariff policies have sparked fears of a trade war and economic slowdown, adding to market fragility. “The world has moved on since 2023, and Moody’s is marking-to-market,” noted a Financial Times analysis, reflecting the agency’s recognition of deteriorating fiscal metrics.
Despite these challenges, Moody’s maintains a stable outlook, citing America’s “exceptional credit strengths.” The U.S. economy, with a GDP per capita of $85,812 and 2.8% growth in 2024, remains a global powerhouse. The dollar’s status as the world’s reserve currency ensures “extraordinary funding capacity,” allowing the government to finance deficits at relatively predictable costs. “The US dollar’s status as the world’s dominant reserve currency provides significant credit support to the sovereign,” Moody’s stated, dismissing fears of a rapid exodus from dollar assets. The agency also expressed confidence in the Federal Reserve’s independence and the resilience of U.S. institutions, noting, “The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period.”
This optimism, however, is tempered by risks. Trump’s recent comments questioning the Federal Reserve’s independence and threatening to fire Chair Jerome Powell have raised eyebrows. Moody’s warned that “a weakening of institutions and governance strength” could strain the rating further. Political dysfunction, exemplified by last summer’s near-default and the ouster of House Speaker Kevin McCarthy, has already tested the system. Senate Democratic Leader Chuck Schumer seized on the downgrade to criticize Trump, stating, “Moody’s downgrade of the United States’ credit rating should be a wake-up call to Trump and Congressional Republicans to end their reckless pursuit of their deficit-busting tax giveaway.” Yet, Democrats share responsibility, as deficits have grown under successive administrations.
Restoring the Aaa rating is possible but daunting. Moody’s suggested that “the implementation of fiscal reforms to significantly slow and eventually reverse the deterioration in debt affordability and fiscal deficits, either by materially increasing government revenues or reducing spending,” could lead to an upgrade. This would require bipartisan cooperation, a tall order in today’s polarized climate. Conversely, a “significantly faster and larger deterioration in fiscal metrics” or erosion of institutional strength could prompt further downgrades. While Moody’s considers a rapid shift away from the dollar unlikely, such a scenario would exacerbate the interest burden and destabilize markets.
The downgrade also carries risks for Moody’s itself. After S&P’s 2011 downgrade, the agency faced intense backlash, including a $5 billion federal lawsuit and public calls for retribution. Moritz Kraemer, former S&P sovereign ratings chief, warned on LinkedIn that “the danger of retribution was real,” noting the Securities and Exchange Commission’s potential vulnerability to White House pressure under Trump. The administration’s swift dismissal of Moody’s analysis and attacks on Zandi suggest a similar playbook may be in motion, raising questions about the independence of regulatory oversight.
For Americans, the downgrade is a stark reminder of the stakes. U.S. Treasuries, long considered the safest of safe havens, have lost some luster, potentially raising borrowing costs across the economy. The path to fiscal sustainability requires tough choices—higher taxes, reduced spending, or both—none of which are politically palatable. As markets digest the downgrade and Congress grapples with its fiscal responsibilities, the nation stands at a crossroads. Will it heed Moody’s warning and chart a course toward discipline, or continue down a path of deficits and dysfunction? The answer will shape America’s economic future and its standing in the global financial system.
With reporting by Bloomberg, Financial Times, and Reuters
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