Moody’s has downgraded the long-term credit rating of the United States from ‘AAA’ to ‘Aa1’, raising concerns about the country’s growing debt and rising borrowing costs. The decision, announced this week, follows years of expanding federal deficits and political gridlock. Moody’s, the last of the three major credit rating agencies to uphold a perfect score for the U.S., pointed to persistent fiscal mismanagement as the key reason. This downgrade may lead to higher interest rates on government borrowing and reduced investor confidence. The White House has criticized the move, blaming past administrations for the current economic challenges.
Moody’s Cuts U.S. Credit Rating After More Than a Century
Moody’s had maintained a ‘AAA’ rating for the United States since 1917. That perfect score signified strong financial health and a reliable ability to repay debts. Now, over a century later, the agency says growing federal debt and interest payments have made the U.S. less creditworthy.
This downgrade places the U.S. in the same category as countries with less stable financial systems. The warning signs had been building. In 2023, Moody’s signaled that the rating might drop if the government failed to rein in spending. Both Fitch and S&P had already lowered their ratings in earlier years, citing similar concerns.
Mounting Debt and Interest Obligations Drive Downgrade
According to Moody’s, the U.S. is facing a long-term financial strain. Federal debt now exceeds levels seen in peer economies. The agency projects that by 2035, U.S. debt could reach 134% of Gross Domestic Product (GDP), up from 98% in the previous year.
Interest payments alone are rising fast, adding pressure to an already stretched budget. These rising costs limit the government’s ability to respond to future economic challenges and emergencies.
Political Divisions Add to Economic Risks
Moody’s cited political dysfunction as a contributing factor. Repeated standoffs in Congress over debt limits, spending bills, and tax reforms have created uncertainty.
One recent example is the rejection of a large spending bill backed by former President Donald Trump. Dubbed a “big, beautiful bill,” it was blocked by the House Budget Committee, with opposition coming even from within his own party. The impasse highlighted the internal divisions that make effective fiscal planning difficult.
White House Criticizes Downgrade Decision
The Biden administration has pushed back against the downgrade. A White House spokesperson claimed Moody’s failed to act during previous years of poor fiscal choices. The administration argues that current policies aim to reduce the deficit over time and stimulate growth.
Despite the downgrade, Moody’s acknowledged strengths in the U.S. economy. These include its large size, high level of innovation, and the continued global dominance of the U.S. dollar. These factors still offer a degree of economic stability.
Shrinking Economy Signals New Challenges
Economic data from the Commerce Department show the U.S. economy shrank by 0.3% on an annual basis in the first quarter of the year. This marks a sharp contrast to the 2.4% growth recorded in the previous quarter.
Analysts attribute the slowdown to reduced government spending and a rush in imports ahead of newly proposed tariffs. These shifts may worsen the overall debt picture and put additional pressure on the federal budget.
Impact on Borrowing and Global Standing
A lower credit rating typically means that borrowing money becomes more expensive. This applies not just to the federal government, but also to states, cities, and even businesses that rely on federal stability.
As the U.S. faces higher interest rates and more debt, global investors may seek safer alternatives. While the dollar remains a powerful global currency, its status could weaken if fiscal uncertainty continues.
The U.S. Treasury Department has not yet issued a formal response to the downgrade. Market analysts expect further debate in Congress on spending reforms and deficit reduction. Without meaningful changes, future downgrades could follow.
Moody’s has left the outlook for the U.S. as “stable” for now, meaning no immediate further downgrade is expected. However, continued growth in debt and political inaction could change that view in the coming years.