Citing the expense of rising interest rates and political polarization in Congress, credit rating agency Moody’s Investors Service downgraded its outlook on the US government’s debt on Friday to “negative” from “stable”.
Despite being the latest of the three major credit rating agencies to do so, Moody’s maintained its highest triple-A credit rating on U.S. government debt. In August, Fitch Ratings cut its rating from AAA to AA, and in 2011, Standard and Poor’s downgraded the US. But a worse outlook increases the possibility that Moody’s may eventually revoke the US’s triple-A rating as well.
If borrowers demand higher interest rates on Treasury bills and notes, a downgrade of US debt might have a negative financial impact on taxpayers. The yield on the 10-year Treasury has increased dramatically since July, rising from roughly 3.9% to 4.6% on Friday—an exceptionally rapid increase.
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While the majority of market analysts see other variables as larger drivers—such as the Federal Reserve’s determination to maintaining its benchmark rate at a 22-year high in order to combat inflation—some have speculated that the August Fitch rating may have contributed to that increase.
“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’s fiscal deficits will remain very large, significantly weakening debt affordability,” the agency stated in a statement.
Moody’s ruling was questioned by the Biden administration.
Deputy Treasury Secretary Wally Adeyemo stated, “We disagree with the shift to a negative outlook, even though Moody’s maintains the United States’ Aaa rating.” “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
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The federal government’s budget deficit increased from USD 1.38 trillion to USD 1.7 trillion in the fiscal year that concluded on September 30. Analysts have cautioned that if interest rates rise, a growing portion of tax revenue will be consumed by interest payments on the national debt.
In a related development, congressional representatives departed Washington for the weekend without a strategy in place to avert a possible government shutdown that might happen by November 17. Moody’s downgraded its assessment of US debt, citing legislative instability as one of the reasons.
“Recently, multiple events have illustrated the depth of political divisions in the US: Renewed debt limit brinkmanship, the first ouster of a House Speaker in US history, prolonged inability of Congress to select a new House Speaker, and increased threats of another partial government shutdown,” said Moody’s.
