ECONOMYNEXT – Moody’s Ratings has downgraded the United States by one level to Aa1 from Aaa, and change the outlook from ‘negative’ to ‘stable’ at the lower level as deficit and the interest bill rises, with prospects of a 2017 tax cut for stimulus, continuing.
“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 said in a statement.
“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat.
“In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
Without tax hikes or spending cuts, mandatory spending, including interest expense, projected to rise to around 78 percent of total spending by 2035 from about 73 percent in 2024.
If the 2017 Tax Cuts and Jobs Act is extended, another 4 trillion dollar will be added to the federal fiscal primary deficit (excluding interest payments) over the next decade.
Deficit could widen to 9 percent of GDP by 2035, up from 6.4 percent in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.
Debt is expected to rise to 134 percent of GDP by 2035, compared to 98 percent in 2024.
Despite high demand for US Treasury assets, higher Treasury yields are high reducing debt affordability.
Federal interest payments are likely to absorb around 30 percent of revenue by 2035, up from about 18 percent in 2024 and 9 percent in 2021.
The US general government interest burden, which takes into account federal, state and local debt, absorbed 12 percent of revenue in 2024, compared to 1.6 percent for Aaa-rated sovereigns.
High inflation created by the Federal Reserve tends to push up interest rates which may or may not be real.
“…[W]hile recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve,” Moody’s claimed.
“Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.”
The US Fed however is running radically different operating framework from the past, involving excess liquidity (abundant reserve regime) which was last seen during World War II, when private credit was weak, analysts say.
The US was running budget surpluses under low and falling retail prices (Great Moderation) in the late 1990s when the ‘independent’ Federal Reserve started a false deflation scare printed firing an asset-price and commodity bubble (housing/food crisis).
The bursting of the multiple bubbles then triggered a series of stimulus programs under Keynesian doctrine which destroyed budgets.
The ‘independent’ central bank under Jerome Powell then fired the highest inflation since the early 1980s using an abundant reserve regime and is now struggling to bring down consumer prices.
By the late 1970s, the US had even higher inflation after the Federal Reserve busted the gold standard in the pursuit of ‘full-employment’ policies.
The US, as well as most advanced nation reserve currency central banks are now running an abundant reserve regime with excess liquidity, which has made it difficult to control inflation and boost growth, through asset prices are rising with inflation.
The high recent inflation has worsened public discontent and led to the election of Donald Trump twice, who is threatening longstanding institutional framework of the US that made it a safe haven in the past.
“The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period,” Moody’s claimed.
“While these institutional arrangements can be tested at times, we expect them to remain strong and resilient. ”
The full statement is reproduced below:
US credit rating downgraded to Aa1 from Aaa by Moody’s
ECONOMYNEXT – Moody’s Ratings has downgraded the United States by one level to Aa1 from Aaa, and change the outlook from ‘negative’ to ‘stable’ at the lower level.
“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 said in a statement.
“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat.
“In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
Without tax hikes or spending cuts, mandatory spending, including interest expense, projected to rise to around 78 percent of total spending by 2035 from about 73 percent in 2024.
If the 2017 Tax Cuts and Jobs Act is extended, another 4 trillion dollar will be added to the federal fiscal primary deficit (excluding interest payments) over the next decade.
Deficit could widen to 9 percent of GDP by 2035, up from 6.4 percent in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.
Debt is expected to rise to 134 percent of GDP by 2035, compared to 98 percent in 2024.
Despite high demand for US Treasury assets, higher Treasury yields are high reducing debt affordability.
Federal interest payments are likely to absorb around 30 percent of revenue by 2035, up from about 18 percent in 2024 and 9 percent in 2021.
The US general government interest burden, which takes into account federal, state and local debt, absorbed 12 percent of revenue in 2024, compared to 1.6 percent for Aaa-rated sovereigns.
High inflation created by the Federal Reserve tends to push up interest rates which may or may not be real.
“…[W]hile recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve,” Moody’s claimed.
“Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.”
The US Fed however is running radically different operating framework from the past, involving excess liquidity (abundant reserve regime) which was last seen during World War II, when private credit was weak, analysts say.
The US was running budget surpluses under low and falling retail prices (Great Moderation) in the late 1990s when the ‘independent’ Federal Reserve started a false deflation scare printed firing an asset-price and commodity bubble (housing/food crisis).
The bursting of the multiple bubbles then triggered a series of stimulus programs under Keynesian doctrine which destroyed budgets.
The ‘independent’ central bank under Jerome Powell then fired the highest inflation since the early 1980s using an abundant reserve regime and is now struggling to bring down consumer prices.
By the late 1970s, the US had even higher inflation after the Federal Reserve busted the gold standard in the pursuit of ‘full-employment’ policies.
The US, as well as most advanced nation reserve currency central banks are now running an abundant reserve regime with excess liquidity, which has made it difficult to control inflation and boost growth, through asset prices are rising with inflation.
The high recent inflation has worsened public discontent and led to the election of Donald Trump twice, who is threatening longstanding institutional framework of the US that made it a safe haven in the past.
“The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period,” Moody’s claimed.
“While these institutional arrangements can be tested at times, we expect them to remain strong and resilient. ”
The full statement is reproduced below:
Moody’s Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable
New York, May 16, 2025 — Moody’s Ratings (Moody’s) has downgraded the Government of United States of America’s (US) long-term issuer and senior unsecured ratings to Aa1 from Aaa and changed the outlook to stable from negative.
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.
Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.
The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve. The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.
The US’ long-term local- and foreign-currency country ceilings remain at Aaa. The Aaa local-currency ceiling reflects a small government footprint in the economy and extremely low risk of currency and balance of payment crises. The foreign-currency ceiling at Aaa reflects the country’s strong policy effectiveness and an open capital account, reducing transfer and convertibility risks.
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE RATINGS DOWNGRADE TO Aa1
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability. Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks at Aa1. A number of credit strengths offer resilience to shocks.
The US economy is unique among the sovereigns we rate. It combines very large scale, high average incomes, strong growth potential and a track-record of innovation that supports productivity and GDP growth. While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US’ long-term growth will be significantly affected.
In addition, the US dollar’s status as the world’s dominant reserve currency provides significant credit support to the sovereign. The credit benefits of the dollar are wide-ranging and provide the extraordinary funding capacity that helps the government finance large annual fiscal deficits and refinance its large debt burden at moderate and relatively predictable costs. Despite reserve diversification by central banks globally over the past twenty years, we expect the US dollar to remain the dominant global reserve currency for the foreseeable future.
Underpinning the rating is our assumption that the US’ institutions and governance will not materially weaken, even if they are tested at times. In particular, we assume that the long-standing checks and balances between the three branches of government and respect for the rule of law will remain broadly unchanged. In addition, we assess that the US has capacity to adjust its fiscal trajectory, even as policy decision-making evolves from one administration to the next.
Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions. Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 85,812 (2024) (also known as Per Capita Income)
Real GDP growth (% change): 2.8% (2024) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9% (2024)
Gen. Gov. Financial Balance/GDP: -7.5% (2024) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.9% (2024) (also known as External Balance)
External debt/GDP: 88.0% (2024)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
Moody’s Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable
New York, May 16, 2025 — Moody’s Ratings (Moody’s) has downgraded the Government of United States of America’s (US) long-term issuer and senior unsecured ratings to Aa1 from Aaa and changed the outlook to stable from negative.
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.
Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.
The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve. The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.
The US’ long-term local- and foreign-currency country ceilings remain at Aaa. The Aaa local-currency ceiling reflects a small government footprint in the economy and extremely low risk of currency and balance of payment crises. The foreign-currency ceiling at Aaa reflects the country’s strong policy effectiveness and an open capital account, reducing transfer and convertibility risks.
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE RATINGS DOWNGRADE TO Aa1
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability. Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks at Aa1. A number of credit strengths offer resilience to shocks.
The US economy is unique among the sovereigns we rate. It combines very large scale, high average incomes, strong growth potential and a track-record of innovation that supports productivity and GDP growth. While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US’ long-term growth will be significantly affected.
In addition, the US dollar’s status as the world’s dominant reserve currency provides significant credit support to the sovereign. The credit benefits of the dollar are wide-ranging and provide the extraordinary funding capacity that helps the government finance large annual fiscal deficits and refinance its large debt burden at moderate and relatively predictable costs. Despite reserve diversification by central banks globally over the past twenty years, we expect the US dollar to remain the dominant global reserve currency for the foreseeable future.
Underpinning the rating is our assumption that the US’ institutions and governance will not materially weaken, even if they are tested at times. In particular, we assume that the long-standing checks and balances between the three branches of government and respect for the rule of law will remain broadly unchanged. In addition, we assess that the US has capacity to adjust its fiscal trajectory, even as policy decision-making evolves from one administration to the next.
Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions. Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 85,812 (2024) (also known as Per Capita Income)
Real GDP growth (% change): 2.8% (2024) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9% (2024)
Gen. Gov. Financial Balance/GDP: -7.5% (2024) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.9% (2024) (also known as External Balance)
External debt/GDP: 88.0% (2024)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
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