Moody’s downgraded America’s sovereign credit rating on Friday due to concerns about the nation’s growing $36 trillion debt pile.
Moody’s first gave the United States its pristine “Aaa” rating in 1919 and is the last of the three major credit agencies to downgrade it. Friday’s cut by one notch to “Aa1” follows a change in 2023 in the agency’s outlook on the sovereign due to wider fiscal deficits and higher interest payments.
Reuters says that the cut could complicate President Donald Trump‘s efforts to cut taxes and send ripples through global markets.
“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 on Friday, as it changed its outlook on the U.S. to “stable” from “negative.”
“While we recognize the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said in a statement Friday.
In explaining the decision, the credit assessor pointed out that for more than a decade, “US federal debt has risen sharply due to continuous fiscal deficits” and cited pressure from higher interest rates.
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s added in the statement.
The announcement was criticized by the White House communications director Steven Cheung.
He reacted to the downgrade via a social media post, singling out Moody’s economist, Mark Zandi, for criticism. He called Zandi a political opponent of Trump. “Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again,” Cheung said.
The announcement also drew criticism from people close to Trump.
Stephen Moore, former senior economic advisor to Trump and an economist at Heritage Foundation, called the move “outrageous”. “If a US-backed government bond isn’t a triple-A asset, then what is?” he told Reuters.
Joe Lavorgna, former chief economist for the White House National Economic Council during Trump’s first term, called the timing of the announcement “just very strange” in an interview on Bloomberg Television Friday. He said that on the revenue side, Moody’s assumptions were “too pessimistic” on growth.
“Certainly, the fiscal hawks will use this as a reason to be more careful on the outlook,” Lavorgna added.
Bloomberg notes that while it’s unclear if the downgrade will lead to policy changes in Washington, the move comes with the federal budget deficit running near $2 trillion a year, or more than 6 percent of gross domestic product. Higher interest rates over the past several years have also pushed up the cost to service the government’s debt.
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