In a significant financial development, Moody’s Investors Service has lowered its credit rating for the United States from a prestigious Aaa to Aa1. This marks a pivotal moment as it highlights rising government debt levels and expanding budget deficits.

Declining Credit Rating Explained

On a recent Friday afternoon, Moody’s announced its decision, shifting the outlook from negative to stable while acknowledging the nation’s economic strengths. The rating agency emphasized that the decline in fiscal metrics has begun to overshadow these strengths.

Fiscal Projections and Concerns

According to Moody’s, federal deficits are expected to surge to nearly 9% of GDP by 2035, up from 6.4% last year. This rise is attributed to escalating interest payments, entitlement spending, and relatively low revenue generation.

Moody’s characterization of the downgrade outlines ten years of increasing government debt and interest payment ratios that exceed levels found in similarly rated sovereigns.

Response from the White House

The White House has dismissed the downgrade, questioning the credibility of Mark Zandi, Moody’s chief economist, stating, “Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again.”

Historical Context

This downgrade is historic, as it marks the first time the US lacks a triple-A rating from any of the three major credit agencies. S&P made the initial cut in 2011, followed by Fitch in 2023.

Yesha Yadav, a law professor at Vanderbilt, remarked that this recent rate cut reflects a sobering reality for US debt management, urging policymakers to act promptly to retain the US’s status as the world’s key risk-free asset.

Market Reaction

Following the announcement, US government bond yields saw an uptick, with the 10-year Treasury yield rising by 0.05 percentage points to reach 4.49%. This response indicates market unease, as yields generally increase when bond prices decline.

Andy Brenner, the head of NatAlliance Securities, emphasized that the primary challenge now lies not in tariffs but in the stagnation of deficit discussions in Washington, which exerts pressure on Treasury securities.

Trump’s Proposed Budget Bill

The Republican budget bill proposed by President Trump faced setbacks in the House of Representatives due to concerns that it could further increase the federal deficit. The legislation, referred to as the “Big Beautiful Bill,” seeks to prolong 2017 tax cuts, which could result in an estimated $4.2 trillion deficit increase over the next decade.

Despite the administration’s optimism that the tax cuts would enhance growth and reduce the deficit, they could potentially add up to $5.2 trillion to the national debt, which currently stands at $29 trillion.

Experts Weigh In

Economists, including Steven Grey of Grey Value Management, attributed the downgrade to years of fiscal mismanagement, highlighting that this downgrade represents a negative outlook on America’s ability to rectify its financial issues. Ann Rutledge, a former senior analyst at Moody’s, echoed these concerns, labeling the downgrade a profound warning for the future.