Moody’s Investors Service on Friday changed its outlook for the U.S. credit rating from “stable” to “negative,” citing both the rapidly expanding national debt during a time of high interest rates and American politicians’ inability to deal with the situation.
The move is less serious than an actual credit-rating downgrade but does signal that Moody’s analysts are growing more concerned about the dynamics underlying the growth of the national debt. Moody’s is the last of the big three ratings agencies to maintain its top rating on U.S. credit; earlier this year, Fitch lowered its the United States from AAA to AA+ in the wake of a fierce political battle over raising the debt ceiling. S&P Global made the same move in 2011 during an earlier fight over the debt limit.
“The key driver of the outlook change to negative is Moody's assessment that the downside risks to the US' fiscal strength have increased and may no longer be fully offset by the sovereign's unique credit strengths,” the analysts wrote. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the US' fiscal deficits will remain very large, significantly weakening debt affordability. Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
At the same time, Moody’s said that the “exceptional economic strength” of the U.S. allows the agency to maintain its current top rating. “The affirmation of the Aaa ratings reflects Moody's view that the US' formidable credit strengths continue to preserve the sovereign's credit profile,” the analysts wrote.
The politics of debt: The move by Moody’s could be a political liability for Democrats and the Biden administration as they fight with Republicans over spending levels in the 2024 budget. Citing concerns about the debt and deficit, Republican hardliners in the House want to slash spending below levels agreed to by former speaker Kevin McCarthy last summer — with McCarthy’s failure to win spending cuts in the 2024 budget agreement being the driving factor behind his overthrow.
On Monday, Russell Vought — who led the Office of Management and Budget in the final two years of the Trump administration and is expected to play a major role in a new Republican administration should Donald Trump win the election in 2024 — used Moody’s move to criticize the new plan from House Speaker Mike Johnson to fund the government for its lack of spending cuts. “Unfortunately, todays House CR fully funds Biden’s woke & weaponized bureaucracy on the heels of yet another credit agency warning,” Vought wrote on social media.
The political dynamic can cut both ways, though, with the White House blaming Republicans for the persistent political turmoil over the debt. “Moody’s decision to change the U.S. outlook is yet another consequence of congressional Republican extremism and dysfunction,” White House Press Secretary Karine Jean-Pierre said in a statement.
Deputy Treasury Secretary Wally Adeyemo also pushed back against the Moody’s decision, arguing that the economy “remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
However the politics play out, analysts expect the debt to be an unavoidable issue for the foreseeable future. “Interest rates have shifted materially and structurally higher,” William Foster, a senior credit officer at Moody’s, told Bloomberg. “This is the new environment for rates. Our expectation is that these higher rates and deficits around 6% of GDP for the next several years, and possibly higher, means that debt affordability will continue to pressure the US.”
As for what happens next, Foster said lawmakers need to address the problem directly. “While we could resolve the outlook next year if we see meaningful progress, it’s more likely in 2025,” he said. “We need to have evidence that the government will reduce deficits either through lower spending, or other measures or raise revenues.”