Moody’s Investors Service has cut its rating on U.S. sovereign debt, removing the country’s last pristine credit score among the major agencies. The move has sparked immediate reactions across financial markets and reignited debate over America’s fiscal trajectory. Here’s what happened, why it matters, and how it could affect investors, policymakers, and the broader economy.
On Friday, Moody’s lowered the U.S. credit rating from its highest AAA to AA1, citing persistent growth in federal debt and a lack of effective political action to address ballooning deficits and rising interest costs. The downgrade follows similar moves by Fitch in 2023 and S&P Global Ratings back in 2011, leaving the U.S. with no top-tier rating from any of the three major agencies.
Moody’s pointed to the U.S. government’s inability-across multiple administrations-to reverse the trend of rising fiscal deficits and interest expenses. The agency noted that the nation’s debt now stands at $36 trillion, and projected that federal deficits could widen to nearly 9% of GDP by 2035, up from 6.4% this year. The agency also flagged concerns about a new legislative package in Congress that could further increase the national debt by trillions of dollars.
The downgrade had an instant effect on financial markets. Stocks dropped at the open on Monday, with the Dow Jones Industrial Average falling 295 points (0.7%), the S&P 500 down 0.9%, and the Nasdaq off 1.2%. The announcement triggered a selloff in U.S. Treasuries, pushing yields higher and raising the cost of government borrowing. The U.S. dollar also weakened in early trading.
“This is a major symbolic move as Moody’s were the last of the major rating agencies to have the U.S. at the top rating,” a Deutsche Bank analyst told ABC News. The spike in yields reflects investors’ concerns about the government’s ability to manage its fiscal obligations and the potential for higher interest rates throughout the economy.
A downgrade in sovereign credit rating typically signals a higher perceived risk of default, even if actual default remains extremely unlikely for a country with the U.S. dollar’s global reserve status. The most direct consequence is that the government may face higher borrowing costs, as investors demand greater compensation for perceived risk. This can ripple out to the private sector, raising interest rates for businesses and consumers as well.
Hakim Tolou, founder of Tolou Management, noted that the downgrade is expected to “ultimately result in higher borrowing expenses for both the public and private sectors in the U.S.”. While many funds have adjusted their investment guidelines since previous downgrades, the move by Moody’s still serves as a warning shot, refocusing market attention on fiscal policy and the ongoing Congressional debate over new spending and tax measures.
The downgrade comes amid a contentious debate in Congress over a sweeping legislative package that includes tax cuts, increased spending, and reductions to safety-net programs-measures that could add trillions to the national debt. The nonpartisan Congressional Budget Office has warned that the proposed legislation could increase the national debt by about $3.3 trillion by 2034, or $5.2 trillion if temporary provisions are extended. Moody’s expressed skepticism that any significant deficit reduction will come from the current fiscal proposals.
Moody’s also cited decades of political gridlock and a lack of willingness from both parties to address the structural drivers of the deficit, including entitlement spending and insufficient revenue. Despite these challenges, the agency acknowledged the U.S. retains significant credit strengths, such as economic size, resilience, and the dollar’s role as the world’s reserve currency.
While the downgrade is unlikely to trigger forced selling by funds restricted to top-rated securities, many have already adjusted their rules since the S&P downgrade in 2011, it does serve as a wake-up call for policymakers and investors alike. The focus now shifts to whether Congress can agree on a credible plan to address long-term fiscal challenges or if further market volatility and higher borrowing costs will become the new normal.
For now, the U.S. remains a pillar of the global financial system, but the Moody’s downgrade is a reminder that even the world’s largest economy is not immune to the consequences of rising debt and political stalemate.
