In a significant development, Moody’s Investors Service has lowered its outlook on the US government’s debt from “stable” to “negative.” Citing concerns over the escalating costs of rising interest rates and the deepening political polarization in Congress, Moody’s decision raises apprehensions about the potential impact on the US credit rating.
While Moody’s has maintained its top triple-A credit rating for US government debt, it is the last of the three major credit rating agencies to do so. Fitch Ratings downgraded its rating to AA from AAA in August, and Standard and Poor’s took similar action in 2011. The shift in outlook, however, heightens the risk that Moody’s could eventually strip the US of its triple-A rating.
A lower credit rating could pose financial implications for taxpayers, potentially leading to higher interest rates on Treasury bills and notes. The yield on the 10-year Treasury has experienced a significant increase since July, rising from approximately 3.9% to 4.6% as of Friday, reflecting an unusually sharp ascent.
Moody’s expressed concern about the lack of effective fiscal policy measures to address the sizable fiscal deficits, predicting that they will persist without significant efforts to reduce government spending or increase revenues. The agency highlighted the weakening debt affordability in the context of higher interest rates.
The Biden administration pushed back against Moody’s decision, with Deputy Treasury Secretary Wally Adeyemo stating, “While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook.” Adeyemo emphasized the strength of the American economy and the prominence of Treasury securities as a global safe and liquid asset.
Moody’s decision comes against the backdrop of a federal budget deficit that jumped to $1.7 trillion in the fiscal year ending September 30, up from $1.38 trillion the previous year. Analysts have warned that with interest rates on the rise, interest costs on the national debt could consume an increasing share of tax revenue.
The political landscape in Congress further compounds the challenges. Moody’s pointed to congressional dysfunction, citing events like renewed debt limit brinkmanship, the historic ouster of a House Speaker, the prolonged inability of Congress to select a new House Speaker, and heightened threats of another partial government shutdown as reasons for lowering its outlook on US debt.
As lawmakers leave for the weekend without a plan to avert a potential government shutdown by November 17, the uncertainty surrounding US fiscal affairs adds to the complexities that Moody’s has factored into its decision.
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