Moody’s Shifts U.S. Credit Outlook
Moody’s, the last major rating agency to uphold the U.S. government’s top rating, has downgraded its outlook from “stable” to “negative.” This decision, influenced by large fiscal deficits and a decreasing debt affordability, prompted immediate criticism from President Joe Biden’s administration. The move follows a similar downgrade by Fitch earlier this year, amid political tensions surrounding the U.S. debt ceiling. Investors’ concerns about federal spending and political polarization have contributed to a bond market selloff, reaching its lowest point in 16 years. While Moody’s affirmed the long-term issuer and senior unsecured ratings at ‘Aaa,’ it signaled the possibility of a downgrade over the medium term. The agency cited “continued political polarization” as a risk, suggesting a potential lack of consensus on a fiscal plan in Congress. Moody’s expects any significant policy response to the fiscal challenges won’t occur until 2025 due to the political calendar. In response, the Biden administration and Republicans in the U.S. House of Representatives are grappling with budgetary measures to avert a partial government shutdown. Despite Moody’s negative outlook, Treasury Secretary Wally Adeyemo emphasized the strength of the American economy and the world’s trust in U.S. Treasury securities. The downgrade, according to White House spokesperson Karine Jean-Pierre, reflects “congressional Republican extremism and dysfunction.” As Treasury yields surge, Moody’s notes the increased pressure on U.S. debt affordability. While some investors remain skeptical of a significant impact on the bond market, the decision serves as a reminder of potential fiscal challenges ahead. The move coincides with declining poll numbers for President Biden and adds pressure on Republicans to address funding legislation and avoid a government shutdown. House Speaker Mike Johnson criticized Biden’s spending agenda and emphasized the need to tackle the unsustainable national debt. The House and Senate must reach an agreement before November 17 to prevent a government shutdown, highlighting ongoing challenges in managing budget deficits from both parties.