Moody’s Downgrades US Credit Outlook to Negative Amid Rising Debt Concerns

Moody’s Downgrades US Credit Outlook to Negative Amid Rising Debt Concerns

Moody’s Investors Service has recently changed its outlook for the United States credit rating from stable to negative. This decision is based on concerns over the rapidly expanding national debt coupled with high interest rates, as well as the inability of American politicians to effectively address the situation.

Although this move is not as severe as an actual credit rating downgrade, it does indicate growing concern from Moody’s analysts regarding the underlying factors contributing to the growth of the national debt. Moody’s is the last of the three major ratings agencies to maintain its top rating on US credit. Fitch downgraded the United States from AAA to AA+ earlier this year during a contentious political battle over raising the debt ceiling, while S&P Global made a similar downgrade in 2011 during a previous debt limit dispute.

According to Moody’s analysts, the primary reason for the change in outlook to negative is their assessment that there is an increased downside risk to the fiscal strength of the US. They believe this risk is no longer completely offset by the country’s unique credit strengths. In the context of higher interest rates, Moody’s expects that the US will continue to have very large fiscal deficits, significantly weakening the affordability of its debt. Additionally, the continued political polarization within the US Congress raises concerns that future governments may struggle to reach a consensus on a fiscal plan to slow down the decline in debt affordability.

Despite this negative outlook, Moody’s maintains the US’ current top rating due to the country’s exceptional economic strength. The agency believes that the formidable credit strengths of the US continue to preserve its credit profile.

The political implications of Moody’s decision could potentially become a liability for Democrats and the Biden administration as they contend with Republicans over spending levels in the 2024 budget. Republican hardliners in the House, citing concerns about the debt and deficit, are pushing for spending slashes below the levels previously agreed upon during former speaker Kevin McCarthy’s tenure. McCarthy’s failure to secure spending cuts in the 2024 budget agreement was a key factor leading to his overthrow.

Russell Vought, who headed the Office of Management and Budget in the final two years of the Trump administration, used Moody’s downgrade as an opportunity to criticize the lack of spending cuts in the new government funding plan proposed by House Speaker Mike Johnson. On social media, Vought stated, Unfortunately, today’s House CR fully funds Biden’s woke & weaponized bureaucracy on the heels of yet another credit agency warning.

On the other hand, the White House is pointing the finger at Republicans for the ongoing political turmoil surrounding the debt. White House Press Secretary Karine Jean-Pierre stated, Moody’s decision to change the US outlook is yet another consequence of congressional Republican extremism and dysfunction.

Regardless of the political blame game, analysts predict that the debt issue will remain a pressing concern in the foreseeable future. William Foster, a senior credit officer at Moody’s, highlighted that interest rates have significantly shifted higher, and this is the new rate environment. With projected deficits of around 6% of GDP for the next few years, and possibly even higher, the affordability of US debt will continue to be under pressure.

Deputy Treasury Secretary Wally Adeyemo pushed back against Moody’s decision, asserting that the US economy remains strong and that Treasury securities are still considered the world’s premier safe and liquid asset.

Moving forward, Foster believes lawmakers need to directly address the problem at hand. He stated, While we could resolve the outlook next year if we see meaningful progress, it’s more likely in 2025. We need to have evidence that the government will reduce deficits either through lower spending, other measures, or increased revenues.

In conclusion, Moody’s downgrade of the US credit outlook to negative reflects growing concerns over the nation’s expanding debt and the inability of politicians to effectively address the issue. This decision serves as a reminder of the challenges faced by the United States in managing its fiscal strength. Both parties will need to find a way to work together and implement effective fiscal policies to mitigate the decline in debt affordability.