Last week, Moody's lowered its U.S. credit rating amid concerns over its $36 trillion debt pile. The move has ripples through financial markets and may complicate President Donald Trump’s efforts to cut taxes.
Moody's rating agency lowered the U.S. government's credit score from the original AAA to AA1. It cites rising debt and interest costs “significantly higher than sovereignty with similar ratings.”
This lowered the U.S. credit score in 2023 after last week's cuts, after downgraded rating rival Fitch. Fitch is the second major rating agency, after rating it AAA, after rating it after Standard & Poor in 2011.
Investors use credit ratings to assess risk profiles for companies and governments. The lower the borrower's rating, the higher the financing cost.
"The continuous U.S. government and Congress have failed to reach a consensus on a trend to reverse large annual fiscal deficits and growing interest costs," Moody's said in a press release last week.
"For more than a decade, U.S. federal debt has risen sharply due to ongoing fiscal deficits. During this period, federal spending has increased, while tax cuts have reduced government revenues."
The downgrade marks the first time Moody's lowered Washington's credit score since 1949, which it began rating U.S. government debt.
Since returning to the White House in January, Trump said he would balance the budget, while Treasury Secretary Scott Bessent repeatedly said the administration aims to reduce its borrowing costs.
But Trump's attempt to cut spending through Elon Musk's administration efficiency far exceeds his initial goal. Washington's debt has proven to grow by about $1 trillion every three months.
Meanwhile, it is unclear whether attempts to raise revenue through tariffs, which raises concerns about a trade war and a global slowdown, will work. Most economists think they won't.
For decades, U.S. government bonds have been the global "risk-free" benchmark for other financial assets. However, there are increasingly doubts.
Tax revenue this year is as high as 16% (or $6.84 billion) to pay interest on debt, according to U.S. Treasury Department data. In Germany, by comparison, that number is close to 4%.
Moody's said the U.S. federal deficit is expected to expand to 9% of GDP by 2035, up from 6.4% in 2024, "mainly driven by increased interest payments on debt...relatively low (tax)".
It expects the federal debt burden to increase to 134% of GDP by 2035, compared with 98% in 2024. In the context, in 1920, in 1920, the debt-to-GDP ratio reached 133%.
Despite this, Moody's insists that the United States "remains outstanding credit advantages such as scale, resilience and vitality, and the continued role of the US dollar as a global reserve currency."
"If Moody has any credibility, they will not remain silent because the fiscal disaster of the past four years (under President Joe Biden) has unfolded," White House spokesman Kush Desai said in a statement.
The White House described Moody's downgrade as a political motivation. White House Communications Director Steven Cheung said Moody's chief economist Mark Zandi was a Trump critic.
Trump is pushing members of Congress (controlled by his Republican Party) to pass a bill to expand the proposed tax cuts in 2017. These cuts were his signature first achievement, cutting corporate and personal taxes.
Moody's recent downgrade was a bill extending tax breaks, so it failed to clear procedural barriers Friday as some Republicans in the House demanded deeper spending cuts and then blocked the measure.
Then, late Sunday, the reservation dropped their opposition and allowed it to pass the committee. Now, tax proposals are closer to the full vote.
Moody's said the fiscal proposals considered were inconsistent with the ongoing reduction in deficits and the ongoing reduction in ongoing tax cut negotiations, which would increase the debt burden to 134% of GDP over the next decade.
"Moody's downgrade of the U.S. credit rating should be a wake-up call for Trump and Congressional Republicans to end the pursuit of Ruce's weak tax revenue," Senate Democratic leader Chuck Schumer said Friday.
"Sadly, I didn't hold my breath."
Moody downgraded concerns about a wide range of investors reassessing U.S. sovereign debt. As demand for assets falls, so does its price. The yield (the return of an investor from lending to the government) then moves in the opposite direction.
On Monday, the benchmark 10-year yield, which affects companies and consumers' mortgage rates and borrowing costs, rose to more than 4.5%. Since then, they have fallen a little. Longer 30-year bonds will also increase yields.
Moody's announcement made a sensation through the U.S. stock market on Monday, but most of them have recovered over the past two days. Meanwhile, gold fell to $3,220 per ounce, but then fell on Tuesday and Wednesday.
Elsewhere, the value of the dollar has dropped by a basket of currencies. For example, since early May, the pound has risen to its highest level of green, reaching $1.35.
Lower credit ratings often lead to higher bond yields, which will increase the interest rates from mortgages to auto loans to credit card debts, as commercial banks use government bond yields as the basis for setting their own interest rates.
This is crucial for Americans who are one of the highest in the world. According to the International Monetary Fund, U.S. household debt will have revenue of 73% relative to GDP in 2023. The household debt-to-GDP ratio in Switzerland, Australia and Canada is more than 100%.
If the U.S. government continues to spend more on rising debt repayments, public spending will become less on social security, health care and defense, as the cost of the government maintaining itself is getting higher and higher.
Washington could raise taxes to generate more revenue to pay off its debts. But Trump seems to be heading in the opposite direction - lowering taxes and public spending.
Including last week’s monarch credit warning (including last week’s credit warning) addressed investor confidence. Losing AAA status in all three major rating agencies is a symbolic blow to U.S. reputation.