Written by Davide Barbuscia and Pushkala Aripaka
(Reuters) - Moody downgraded the U.S. sovereign credit rating on Friday could complicate President Donald Trump’s efforts to cut taxes and create ripples in global markets due to concerns over the country’s $36 trillion debt pile.
Moody first ranked its original "AAA" rating as the United States in 1919, the last of the three major credit institutions that downgraded it.
A gap cut “AA1” on Friday, which changed the agency’s prospects for sovereignty in 2023 due to fiscal flaws and higher interest payments.
"The continuous U.S. government and Congress failed to reach consensus on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said on Friday.
The news has attracted criticism from people near Trump.
Stephen Moore, a former senior economic adviser to Trump and an economist at the Heritage Foundation, called the move "outrageous." "If the U.S.-backed government bonds are not triple A-Asset, what is that?" he told Reuters.
White House Communications Director Steven Cheung responded to the downgrade through a social media post, picking Moody's economist Mark Zandi for criticism. He called Zandi a political opponent to Trump.
Zandi declined to comment. Zandi is the chief economist at Moody's Analytics, an independent entity with credit rating agency Moody's.
Since returning to the White House on January 20, Trump said he would balance the budget, while his Treasury Secretary Scott Bessent repeatedly said the goal of the current administration is to reduce the cost of funding for the U.S. government.
But so far, government attempts to increase revenue and cut spending have failed to convince investors.
Trump's attempt to cut spending through Elon Musk's administration's efficiency is far beyond his original goal. And attempts to increase revenue through tariffs have sparked concerns about trade wars and global slowdowns, homeless markets.
The remaining annoyance could trigger damage to the bond market and hinder the government's ability to pursue its agenda.
The downgrade comes after the market shutdown, which issued yields at higher bonds, and analysts say it could pause investors when the market reopens for regular trading.
"This basically adds evidence that the U.S. has too much debt," said Darrell Duffie, a Stanford finance professor. "Congress only needs disciplinary action, either getting more income or spending less income."
Focus on deficits
Trump is pushing Republican-controlled members of Congress to pass a bill to expand the 2017 tax break, a move his signature first legislative achievement, a move that nonpartisan analysts say will increase trillions of dollars in federal government debt.
The downgrade comes as the tax bill failed to clear key procedural barriers on Friday as tough Republicans demanded deeper spending cuts that cuts were prevented by rare political setbacks for a congressional Republican president.
Moody's said the fiscal proposals considered are unlikely to result in a sustained multi-year reduction in the deficit and estimated that the federal debt burden will increase to 134% of GDP by 2035, compared with 98% in 2024.
"Moody's downgrade of credit rating for the U.S. should be a call for Trump and congressional Republicans to end the pursuit of Ruces' tax giveaway," Senate Democratic leader Chuck Schumer said in a statement Friday. "Sadly, I didn't hold my breath."
The cut was downgraded by rival Fitch, which also cut a notch of the U.S. sovereignty rating in August 2023, citing expected fiscal deterioration and repeated pragmatic debt-to-debt ceiling negotiations that threaten the government's ability to pay its bills.
Fitch is the second major rating agency to be conducted after Standard & Poor after the 2011 debt ceiling crisis.
"They have to come up with a solid budget agreement that puts the deficit on a downward trajectory," said Brian Bethune, an economics professor at Boston College.
Market vulnerability
Investors use credit ratings to assess the risk profile of companies and governments when raising funds in debt capital markets. Generally, the lower the borrower’s rating, the higher the financing cost.
"Moody's downgrade of U.S. credit ratings is a long and persistent irresponsible trend that will ultimately lead to higher borrowing costs in the public and private sectors in the U.S.," said Spencer Hakimian, CEO of hedge fund Tolou Capital Management.
Hakimians say that long-term fiscal yields may be higher when downgraded bond prices fall, until after the downgrade, banning economic news, which may increase the wind shelter of national debt.
Uncertainty in U.S. financial markets have increased after the downgrade, sparking concerns among investors about higher price pressures and a sharp economic slowdown after Trump's decision to impose tariffs on key trading partners in the past few weeks.
"This news comes at a time when the market is very fragile, so we're likely to see a reaction," said Jay Hatfield, CEO of Infrastructure Capital Advisor.
(Pushkala Aripaka's coverage in Bangalore and Davide Barbuscia in New York; other coverage by Paritosh Bansal, Costas Pitas, Nupur Anand, Ross Kerber and Pete Schroeder; Shilpi Majumdar, Arun Koyyur, Megan Davies and Sandra Maler)Editors