The U.S. Loses Its Final Triple Credit Rating

Moody’s Ratings has stripped the United States of its last remaining top-tier credit score, downgrading the country’s long-held Aaa rating to Aa1. This move reflects growing concerns that America’s rising debt levels and chronic budget deficits could erode the country’s appeal to global investors and push up borrowing costs for the federal government.

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The downgrade comes more than a year after Moody’s shifted its outlook on the U.S. credit profile to negative and now returns to a stable outlook, signaling no further immediate change is expected.

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The decision aligns Moody’s with Fitch Ratings and S&P Global Ratings, both of which had already dropped the U.S. below the triple-A benchmark. In its statement, Moody’s acknowledged America’s economic might and financial resilience but concluded these strengths are no longer enough to offset deteriorating fiscal indicators. The agency cited years of mounting deficits driven by both Republican and Democratic administrations, alongside a Congress that has failed to enact meaningful fiscal restraint.

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Moody’s noted that lawmakers are continuing to negotiate a significant tax and spending package that could further expand the national debt by trillions of dollars in the years to come. The downgrade sent immediate ripples through financial markets. Yields on 10-year Treasury notes rose as high as 4.49%, reflecting investor concern over rising debt risk. Additionally, an ETF tracking the S&P 500 dipped 0.6% in after-hours trading.

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Portfolio managers and economists voiced mixed reactions. Tracy Chen of Brandywine Global Investment Management said the downgrade could signal that investors may now demand higher returns on U.S. Treasuries. While previous downgrades from S&P and Fitch did not spark lasting market instability, Chen noted that investor perceptions may change this time, particularly as the reliability of the U.S. dollar and Treasuries as global safe havens comes under more scrutiny.

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Moody’s action arrives as the federal deficit hovers around $2 trillion annually, exceeding 6% of GDP. The debt load, which has ballooned since the onset of the COVID-19 pandemic, has now surpassed the size of the entire U.S. economy. Rising interest rates have only added to the burden, increasing the cost of servicing government obligations.

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U.S. Treasury Secretary Scott Bessent, speaking to lawmakers earlier this year, described the current fiscal path as “unsustainable” and warned of the risk of a credit crisis. He noted that a sharp halt in economic activity could occur if credit markets seized up, underscoring the urgency of addressing the debt trajectory.

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Meanwhile, political tensions surrounding fiscal policy continue to complicate the landscape. A Republican-led tax-and-spending proposal—which aims to extend provisions from the 2017 Tax Cuts and Jobs Act—has been stalled in Congress due to cost concerns raised by some hardline conservatives. The Joint Committee on Taxation estimates the bill could add $3.8 trillion to the deficit over the next decade, with other forecasts suggesting it may cost even more if temporary measures are made permanent.

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The White House responded to Moody’s move by labeling it a politically motivated decision. Donald Trump’s spokesperson, Steven Cheung, took aim at Mark Zandi, a prominent economist with Moody’s Analytics, calling him a persistent critic of the former president’s policies. Cheung dismissed Zandi’s views as biased, though it’s worth noting that Moody’s Ratings operates independently from Moody’s Analytics. Zandi did not respond to requests for comment.

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Joseph Lavorgna, former chief economist at the White House National Economic Council under Trump and now with SMBC Nikko Securities, questioned the timing of the downgrade. He argued that the U.S. debt-to-GDP ratio—hovering around 100%—is not unprecedented globally and pointed to America’s strong productivity and economic growth as reasons to remain confident.

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Still, longer-term pressures on U.S. finances remain. Economists warn that structural drivers like Social Security and Medicare spending will continue to weigh heavily on the federal budget, especially as the population ages. Added to that are elevated interest payments caused by the current high-rate environment. The Congressional Budget Office noted in March that while a fiscal crisis doesn’t appear imminent, it's difficult to accurately assess the long-term risks.

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Moody’s projects the federal deficit could rise to nearly 9% of GDP by 2035, up from 6.4% in 2024, driven by a combination of rising interest expenses, growing entitlement costs, and weak revenue growth. The agency cited the recent jump in Treasury yields—which now range between 4% and 5%—as a sign of tightening fiscal conditions, levels not seen since before the 2008 financial crisis.

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This downgrade had been expected for some time. In November 2023, Moody’s had flagged potential risks when it cut the U.S. outlook from stable to negative while maintaining its Aaa rating. Such a revision often precedes a downgrade within 12 to 18 months.

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Moody’s now becomes the third and final of the major credit rating agencies to move the U.S. out of the elite credit category. Fitch made its downgrade in August 2023, citing growing dysfunction over the federal debt ceiling. S&P took similar action as far back as 2011 following a bruising political standoff in Washington, and at the time was sharply criticized by the Treasury Department. With all three major agencies now aligned below triple-A, concerns about the U.S. fiscal future are becoming harder to ignore.

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