Moody’s Lowers Outlook on U.S. Debt to “Negative” Amid Rising Economic Concerns

In a move that underscores growing concerns about the global economic and political landscape, Moody’s Investors Service announced on Friday that it has downgraded its outlook on the U.S. government’s debt from “stable” to “negative.”

This decision was attributed to the combination of escalating interest rates and heightened political polarization within Congress.

While Moody’s retained its top triple-A credit rating on U.S. government debt, it is the last of the three major credit rating agencies to do so. Fitch Ratings had previously lowered its rating to AA+ from AAA in August, and Standard & Poor’s downgraded the U.S. in 2011. The shift to a negative outlook, however, raises the risk that Moody’s could eventually strip its triple-A rating from the U.S.

The implications of a lower credit rating are substantial. A reduced rating could lead to increased interest rates on Treasury bills and notes, potentially impacting taxpayers. The yield on the 10-year Treasury has surged from about 3.9% to 4.6% since July, a sharp increase that some market analysts attribute in part to the August Fitch downgrade.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’s fiscal deficits will remain very large, significantly weakening debt affordability,” Moody’s stated in a release.

The Biden administration pushed back against Moody’s decision, pointing at the strength of the American economy.

“While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook,” Deputy Treasury Secretary Wally Adeyemo said. “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”

However, Moody’s cited concerns about congressional dysfunction as one of the reasons for the downgrade in outlook. As lawmakers left Washington for the weekend, there was no clear plan to avoid a potential government shutdown by Nov. 17.

Moody’s highlighted recent events, including debt limit brinkmanship and political turmoil, as indicators of the deepening political divisions in the U.S.

“Recently, multiple events have illustrated the depth of political divisions in the U.S.: Renewed debt limit brinkmanship, the first ouster of a House Speaker in U.S. history, prolonged inability of Congress to select a new House Speaker, and increased threats of another partial government shutdown,” Moody’s said.

The federal government’s budget deficit surged to $1.7 trillion in the budget year that ended on Sept. 30, up from $1.38 trillion the previous year. Analysts warn that with interest rates on the rise, interest costs on the national debt could consume a growing share of tax revenue.

Even though the move by Moody’s does not automatically downgrade America’s creditworthiness, it heightens the possibility. The prospect of a U.S. downgrade could have ripple effects, potentially impacting Americans’ investment portfolios, making borrowing more expensive, and increasing the cost for the government to service its debts.