Moody’s Investors Service has downgraded the United States’ sovereign credit rating from Aaa to Aa1, citing rising fiscal deficits and increasing debt servicing costs due to high interest rates. The agency noted that government debt and interest payment levels have grown significantly over the last decade, outpacing similarly rated countries. This adjustment brings Moody’s in line with other major rating agencies like Standard & Poor’s and Fitch, which had already downgraded U.S. debt in 2011 and 2023, respectively.
Credit Downgrade Shakes Markets, Highlights Deepening Deficits and Fiscal Policy Challenges
The downgrade had immediate effects on financial markets. The yield on the 10-year Treasury note increased to 4.48%, and longer-term bond prices, as tracked by the iShares 20+ Year Treasury Bond ETF, fell about 1% in after-hours trading. The SPDR S&P 500 ETF, which reflects U.S. stock performance, also declined by 0.4%. Though the downgrade is only by one notch, it could contribute to higher borrowing costs for the U.S. government and negatively influence investor sentiment toward American assets.
Moody’s Downgrade Reflects Soaring U.S. Deficits and Mounting Pressure for Fiscal ReformMoody’s expressed concerns about the U.S.’s long-term fiscal outlook, pointing to persistent annual deficits and the lack of meaningful political progress on budget reform. The federal deficit is already at $1.05 trillion for the current fiscal year, 13% higher than the previous year. Moody’s projects that extending the 2017 Tax Cuts and Jobs Act would add about $4 trillion to the primary deficit over the next decade, further worsening the country’s fiscal position.
Rising Deficits and Debt Signal Urgent Need for U.S. Fiscal Policy Reform
According to Moody’s, the federal deficit is projected to reach nearly 9% of GDP by 2035, up from 6.4% in 2024. This increase will primarily result from mounting interest payments, entitlement spending, and insufficient revenue growth. The federal debt burden is expected to climb to 134% of GDP by 2035, compared to 98% in 2024, signaling a deteriorating fiscal trajectory if current policies remain unchanged.
Financial experts, including Peter Boockvar and Fred Hickey, warned that Moody’s move may influence broader investor behavior. There is already concern over waning foreign demand for U.S. Treasury securities amid growing debt levels. The downgrade could lead investors to seek alternative safe-haven assets such as gold, especially as geopolitical and fiscal uncertainties grow. Although largely symbolic, Moody’s action underscores the urgent need for fiscal reform in the U.S. to maintain long-term economic stability.
