Moody's Downgrades Last Remaining Top Tier Credit Rating For US, What Does It Mean?

Moody’s stripped the United States of its last remaining top-tier credit rating, citing mounting debt and persistent fiscal deficits. The decision, made on Friday, downgraded the US sovereign rating by one notch from "Aaa" to "Aa1", ending over a century of the country holding Moody’s highest credit assessment since it was first awarded in 1919.

The downgrade follows a 2023 shift in Moody’s outlook on the US, spurred by widening fiscal gaps and escalating interest payments, reported Reuters. In its latest statement, the agency pointed to the failure of successive administrations and lawmakers to implement measures to curb rising deficits and manage the country’s ballooning interest obligations.

“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said. The outlook, however, has been revised from “negative” to “stable.”

Political Fallout and Market Impact

The decision drew swift political backlash, particularly from those close to President Donald Trump. Stephen Moore, a former Trump economic advisor and now with the Heritage Foundation, labelled the downgrade “outrageous,” questioning, “If a US backed government bond isn't triple A-asset then what is?”

White House communications director Steven Cheung lashed out at Mark Zandi, chief economist at Moody’s Analytics, branding him a political adversary of Trump in a social media post. Zandi, however, declined to respond. It’s worth noting that Moody’s Analytics operates independently from the credit ratings agency.

President Trump, who returned to the Oval Office in January, had vowed to balance the budget and cut government borrowing costs. Yet, his administration’s strategies — including cost-cutting measures under Elon Musk’s Department of Government Efficiency and tariff-led revenue drives — have struggled to achieve their intended outcomes. Investor concerns over a potential trade war and an economic slowdown have intensified, adding pressure on the administration’s fiscal agenda.

The downgrade, announced after US markets closed on Friday, triggered a rise in Treasury bond yields. Analysts now anticipate market volatility when trading resumes. “It basically adds to the evidence that the United States has too much debt,” said Stanford finance professor Darrell Duffie. “Congress is just going to have to discipline itself, either get more revenues or spend less.”

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Budget Roadblocks and Rising Debt Projections

Trump’s push to renew the 2017 tax cuts has also hit a stumbling block. A bill aimed at extending the cuts was blocked on Friday by conservative Republicans demanding further reductions in spending. The failure to pass the measure marks a significant legislative setback for the president and casts doubt over the viability of his fiscal policy agenda.

Moody’s expressed scepticism that current budget proposals would meaningfully reduce the deficit over the long term. According to the agency, the federal debt is projected to climb from 98 per cent of GDP in 2024 to around 134 per cent by 2035. “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,” said Senate Democratic Leader Chuck Schumer. “Sadly, I am not holding my breath.”

This marks the third major credit agency downgrade of the US since 2011. Fitch downgraded the US in August 2023, following in the footsteps of Standard & Poor’s, which did so after the debt ceiling crisis over a decade ago. “They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory,” said Boston College professor Brian Bethune.

What Does A Lower Rating Mean?

Moody’s downgrade has amplified existing market unease. Investors rely heavily on credit ratings to gauge risk in debt markets. A lower rating could drive up borrowing costs for both the federal government and private entities. “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,” warned Spencer Hakimian, CEO of Tolou Capital Management.

With long-term Treasury yields already under pressure, analysts suggest yields could rise further unless offset by economic news that renews demand for safe-haven assets. The announcement also comes amid concerns that Trump’s tariffs on trading partners could lead to inflation and a broader economic downturn. “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.

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