On May 16, 2025, Moody’s Investors Service downgraded the United States’ long-term credit rating from Aaa to Aa1, marking the first time since 1917 that the nation has lost its perfect credit standing with the agency. This move follows similar downgrades by Standard & Poor’s in 2011 and Fitch Ratings in 2023, leaving the U.S. without a top-tier rating from any of the three major credit agencies.
Moody’s cited a decade-long trend of expanding fiscal deficits and escalating interest payments as primary factors for the downgrade. The agency expressed concern over the lack of effective measures to reverse these trends, noting that successive administrations and Congress have failed to implement substantial multi-year reductions in mandatory spending and deficits. Projections indicate that U.S. debt could rise from 98% of GDP in 2024 to 134% by 2035, with mandatory spending and interest payments comprising 78% of total spending.
The timing of the downgrade coincides with the passage of the 2025 reconciliation bill, known as the “Big Beautiful Bill,” which includes significant tax cuts and is expected to widen the fiscal deficit further. While the legislation aims to stimulate economic growth in 2026, the increased borrowing has raised alarms among credit agencies and investors. The bill’s provisions could add approximately $4 trillion to the deficit over the next decade, exacerbating concerns about long-term fiscal sustainability.
Financial markets reacted to the downgrade with increased volatility. Yields on 10- and 30-year U.S. Treasurys rose sharply to 4.6% and 5.2%, respectively, reflecting investor unease over the nation’s fiscal trajectory. Higher borrowing costs for the government may trickle down to consumers and businesses, potentially impacting interest rates for mortgages, credit cards, and small business loans.
The downgrade has also intensified political debates over fiscal responsibility. Treasury Secretary Scott Bessent attributed the weakened fiscal position to the preceding administration’s spending policies, asserting that the current administration is committed to reducing spending and boosting economic growth. However, critics argue that the recent tax cuts and lack of substantial deficit reduction measures undermine these claims.
Economists warn that while short-term economic growth may be bolstered by the new legislation, long-term fiscal sustainability remains a critical concern. The International Monetary Fund has urged the United States to reduce its growing fiscal deficit and address the rising debt-to-GDP ratio, which reached 98% in fiscal year 2024. Without meaningful reforms, the nation’s creditworthiness could face further challenges, potentially leading to additional downgrades and increased borrowing costs.
As the U.S. navigates these fiscal challenges, the Moody’s downgrade serves as a stark reminder of the importance of sustainable economic policies and the potential consequences of prolonged political gridlock.
