Moody’s Downgrades U.S. Credit Rating Amid Rising Deficits and Interest Costs

U.S. Loses Final Triple-A Credit Rating as Moody’s Downgrades to Aa1

Fiscal imbalances and rising interest costs prompt decisive action from last holdout ratings agency

Moody’s Ratings has officially downgraded the United States’ sovereign credit rating from Aaa to Aa1, citing persistent and widening fiscal deficits alongside escalating interest costs. This move removes the final triple-A rating the U.S. held with any major credit ratings firm, following earlier downgrades by S&P Global Ratings in 2011 and Fitch Ratings in 2023.

Key drivers behind the downgrade

According to Moody’s, the downgrade reflects long-standing structural fiscal challenges that U.S. policymakers have failed to address across successive administrations and congressional terms. The agency emphasized that no current legislative proposals show credible prospects for reducing the ongoing mismatch between government expenditures and revenues.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said in its official statement.

The agency noted that expanding deficits would lead to a sustained increase in borrowing needs, contributing to a long-term upward pressure on interest rates. Moody’s also highlighted that the U.S. Treasury market may face marginal stress as a result, though significant disruption appears unlikely at this time.

Market reactions remain subdued—for now

Despite the symbolic weight of losing its last triple-A rating, the U.S. economy remains the world’s largest and most influential. Historically, such downgrades have not led to immediate financial upheaval. For instance, after S&P's 2011 downgrade, U.S. Treasurys actually rallied, reflecting investor confidence in the U.S. as a global safe haven amid economic uncertainty.

Analysts believe the Moody’s downgrade will follow a similar pattern. However, some warn that the cumulative effect of repeated fiscal missteps, combined with geopolitical tensions and inflationary pressures, could erode the United States’ privileged financial position over time.

Rising borrowing costs and potential ripple effects

Michael Goosay, global head of fixed income at Principal Asset Management, pointed out that a lower credit rating could increase the premium investors require for holding U.S. debt. If borrowing becomes more expensive, the resulting rise in debt servicing costs could further deepen the deficit.

“That could generate an even bigger deficit because the cost of servicing our debt would also go up,” Goosay noted.

The downgrade arrives at a time of heightened global scrutiny of U.S. fiscal policy, particularly amid ongoing debates over debt ceilings, spending priorities, and monetary tightening measures by the Federal Reserve.

As the world continues to watch how U.S. policymakers respond to rising fiscal pressure, Moody’s decision may serve as a wake-up call—albeit one with limited immediate market consequences. Still, the long-term credibility of the U.S. financial system could face greater scrutiny if budgetary discipline remains elusive.

Stay tuned to The Horizons Times for in-depth analysis and updates on global financial developments.