Moody’s has lowered the U.S. government’s credit rating from Aaa to Aa1, pointing to rising national debt and a lack of action to cut spending as key reasons for the downgrade.
In a statement on May 16, the credit rating agency said U.S. lawmakers have failed to rein in growing annual deficits or reduce government spending. Moody’s warned that the current budget proposals are unlikely to bring meaningful cuts to mandatory spending or the national deficit.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from the current fiscal proposals under consideration,” Moody’s wrote. “Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat.”
The downgrade moves the U.S. just one notch lower on Moody’s 21-step scale used to assess a country’s credit health.
Despite the near-term concerns, Moody’s maintained a positive long-term outlook, citing the strength of the U.S. economy and the dollar’s global reserve status as key reasons for optimism.
Mixed Reactions from Investors
Reactions to the downgrade were mixed. Some market watchers questioned the credibility of Moody’s, pointing to the agency’s track record during the 2008 financial crisis.
“This is the same Moody’s that gave Aaa ratings to subprime mortgage securities before the 2008 crash,” wrote Gabor Gurbacs, CEO of Pointsville, on X (formerly Twitter).
Meanwhile, Jim Bianco, a well-known macro investor, downplayed the downgrade, calling it a “nothing burger” and suggesting it wouldn’t significantly change how the market views U.S. debt.
Debt Hits $36 Trillion, Pressuring Markets
As of January 2025, U.S. government debt surpassed $36 trillion, and efforts to slow its growth have seen little success. Rising interest rates—like the recent jump in 30-year Treasury bond yields to nearly 5%—signal waning investor confidence.
Higher borrowing costs mean the government must pay more to service its debt, potentially adding to the deficit and creating a vicious cycle: more debt leads to higher interest payments, which leads to even more debt.
Featured image from: Forbes.com