Moody’s Downgrades United States Credit
On Friday, Moody’s, one of the three major credit rating agencies, downgraded the credit rating of the United States by a notch to “Aa1” from “Aaa”, citing rising debt and interest payments “that are significantly higher than similarly rated sovereigns.” This is the first time in history that all three major rating agencies have graded United States debt below AAA. Over the past 12 years, all three major bond rating agencies have downgraded the debt of the United States to below AAA: Standard and Poor’s in 2013, Fitch in 2023, and now Moody’s in 2025. This is a clear signal to policymakers that urgent action is needed to reduce the debt and restore confidence in the fiscal position of the United States of America.
Why Did Moody’s Downgrade the U.S. Now?
Moody’s cited growing concern over the dramatic increase, for more than decade, in government debt as the driving reason for its downgrade. The timing coincides with Congress working to pass a bill that extends tax cuts the 2017 Tax Cuts and Jobs Act (TCJA). Moody’s expressed a lack of confidence that the current budget reconciliation process will result in meaningful multi-year deficit reduction.
Moody’s cited several critical metrics from an analysis that includes an extension of the TCJA as a base case scenario. Moody’s finds that under this scenario:
- Annual deficits will widen from 6.4 percent of GDP in 2024 to 9 percent of GDP in 2035.
- The total federal debt burden that is publicly held will rise from 98 percent of GDP in 2024 to about 134 percent of GDP in 2035.
- As a result of both increasing debt and interest rates, debt payments as a share of Federal revenue have been rising, from 9 percent in 2021 to 18 percent in 2024, and will continue to rise to a staggering 30 percent of revenue in 2035.
- When all general government debt is considered – federal, state, and local – in the U.S., interest absorbed 12 percent of revenue in 2024, compared to only 1.6 percent for other highly rated countries.
In looking at debt as a share of revenue, Moody’s introduces a less common, but important, metric because it is focused on the affordability of the government’s debt. Many state and local governments use debt service, the annual principal and interest payments on debt, as a percent of revenue to calculate their statutory debt limits to ensure that the impact of debt on their budget is manageable and affordable. According to the CATO Institute, about 29 states limit annual state debt-servicing costs. Of these, about 22 states impose debt-servicing limits calculated as a percentage of tax revenues, with an average of 7.2 percent, considerably less than the current U.S. ratio of 18 percent.
What does the Downgrade Mean for Wall Street and Main Street?
While much of the news coverage around economic events focuses on the stock market, which is at best a noisy and volatile indicator, the recent Moody’s downgrade is more likely to have a lasting impact on the U.S. bond market. The indicator that most analysts use to assess the bond market is the yield on the ten-year treasury note. When yields go up it means the government needs to offer a higher interest rate to attract investors.
The immediate reaction to the bond downgrade has been U.S. Treasury yields rising. On Friday, prior to the downgrade announcement, the 10-year yield was 4.40 percent and jumped as high as 4.55 percent on Monday, a large jump for this market, before settling to 4.45 percent. Also on Monday, 30-year Treasury yields rose to its highest level in a year and a half, briefly trading above 5 percent.
From a broader perspective, increasing bond yields put upward pressure on interest rates on houses, cars, and credit cards. Interest rates are already elevated because the Federal Reserve raised interest rates to tamp down inflation. The Fed has taken a cautious approach to lowering interest rates because the tariff policies introduced by the Trump Administration are inflationary.
Restoring America’s Good Credit
Congress can take action now to help restore America’s credit, bring down interest rates, and help families afford their first home or new car by passing a budget that does not add trillions of dollars to the national debt. Congress can also pass common sense legislation, like the Fiscal Commission Act, to bring some sanity back to the budget process. The Fiscal Commission Act would establish a commission tasked with crafting strategies, launching a national public awareness campaign, and providing recommendations to encourage proactive approaches to address our national debt. Crucially, the bill requires that these recommendations receive an expedited floor vote in the House and the Senate.
