Moody's Investors Service delivered a significant update on Friday by revising the outlook on the United States government's debt from "stable" to "negative." The credit rating agency attributed this adjustment to the escalating costs associated with rising interest rates and the increasing political polarization within Congress.
Despite this shift in outlook, Moody's maintained the top triple-A credit rating for U.S. government debt. Notably, it is the last of the three major credit rating agencies to uphold this rating, as Fitch Ratings downgraded to AA from AAA in August, and Standard and Poor's downgraded the U.S. in 2011. However, the altered outlook now heightens the risk that Moody's might eventually strip the U.S. of its coveted triple-A rating, a move that could have financial repercussions for taxpayers if it results in heightened interest rates on Treasury bills and notes.
The yield on the 10-year Treasury has experienced a notable increase since July, surging from approximately 3.9% to 4.6% as of Friday—an unusually sharp rise. While some market analysts attribute this surge to the August Fitch downgrade, others emphasize other factors as more substantial drivers, such as the Federal Reserve's commitment to maintaining its benchmark rate at a 22-year high to combat inflation.
Moody's expressed concern in a statement, noting, "In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the U.S.'s fiscal deficits will remain very large, significantly weakening debt affordability."
In response to Moody's decision, the Biden administration criticized the negative outlook. Deputy Treasury Secretary Wally Adeyemo countered, saying, "While the statement by Moody's maintains the United States' Aaa rating, we disagree with the shift to a negative outlook," emphasizing the strength of the American economy and the global significance of Treasury securities.
Meanwhile, the federal government's budget deficit surged to USD 1.7 trillion in the fiscal year that concluded on September 30, up from USD 1.38 trillion the previous year. Analysts have cautioned that with rising interest rates, interest costs on the national debt are poised to consume an increasing share of tax revenue.
In a separate development, congressional lawmakers left Washington for the weekend without a concrete plan to avert a potential government shutdown looming by November 17. Moody's cited congressional dysfunction as one of the reasons behind the revised outlook on U.S. debt, pointing to recent events that underscored the depth of political divisions in the country. These events include renewed debt limit brinkmanship, the unprecedented ouster of a House Speaker, an extended inability of Congress to select a new House Speaker, and escalating threats of another partial government shutdown.
