For the first time in history, Moody’s has downgraded the United States' credit rating, marking a critical moment in global finance and economic policy. While this is not the first time the US has faced a downgrade, Moody’s move is symbolically powerful—it reinforces the growing concerns around America’s fiscal health and the unsustainable trajectory of its debt.
Moody’s downgrade centers on one alarming prediction: interest payments on US debt are expected to consume nearly 30% of federal revenue by 2035, up from approximately 18% in 2024. This unprecedented burden could significantly limit Washington’s ability to respond to future crises, invest in growth, or manage essential services.
This downgrade follows two prior rating reductions from other agencies. In 2011, Standard & Poor’s stripped the US of its AAA rating, leading to an ~8% drop in the S&P 500 over two months and a ~35% fall in the 10-year Treasury yield. Then, in 2023, Fitch downgraded the US credit rating from AAA to AA+, citing rising debt levels, unaddressed fiscal issues, and aggressive Fed rate hikes. Following the Fitch downgrade, the S&P 500 fell 10% in three months, and the Russell 2000 declined by 17%. However, unlike in 2011, Treasury yields surged nearly 23%—highlighting a shift in how markets are reacting to US fiscal weakness.
Moody’s forecast is grim. It projects the US federal deficit to reach 9% of GDP by 2035, compared to 6.4% in 2024. More startling, the agency expects the federal debt burden to rise to 134% of GDP by 2035, far exceeding the 98% level in 2024. For context, not even during World War II did US debt-to-GDP cross 120%. This projected increase is a red flag for global investors and a ticking time bomb for future policymakers.
The timing of the downgrade also raised eyebrows. Moody’s announced the move at 4:45 PM ET on a Friday—post options expiration and just before futures closed—prompting speculation about the motive behind the timing. The market response was swift and similar to 2023: stocks fell and yields rose. This mirrored investor concerns that had already been mounting for over a year due to persistent deficit spending, the impact of the basis trade unwinding, and an increasingly uncertain fiscal outlook. As a result, the 10-year Treasury yield and the S&P 500 have continued to diverge in performance.
Currently, interest rates remain roughly 90 basis points higher than they were before the Federal Reserve's much-anticipated pivot. This suggests that structural pressures—especially from relentless government borrowing—are overpowering traditional monetary tools and dampening the impact of policy shifts.
Some analysts downplay the importance of the downgrade, arguing that global investors will continue to buy US debt regardless of credit ratings. While that may be true in the short term due to the dollar’s dominance and the US’s role as a safe haven, over the long run, unsustainable fiscal behavior could shake that confidence. Ignoring the warning signs now only amplifies the risk later.
Interestingly, Moody’s announcement came just hours after former President Trump's proposed budget bill was rejected in Congress. Some Republican lawmakers refused to back the bill, demanding even steeper spending cuts. The proposed budget would have added more than $2.5 trillion to the US deficit, further fueling Moody’s concerns. While debates over whether credit rating actions are politically motivated continue, the larger point stands: the US deficit is dangerously out of control.
In 2024, government spending accounted for approximately 34% of US GDP—a historic high outside of crisis periods. This is a glaring indication that America’s economic engine is increasingly reliant on federal outlays rather than organic, private-sector growth.
Deficit reduction should not be a partisan issue. It is an economic imperative that demands bipartisan cooperation and swift policy action. Without structural reform, the US risks losing not just its top credit ratings, but also its long-term financial stability and global economic leadership.
Disclaimer:
This article is for informational purposes only and does not constitute financial, investment, or trading advice. The content reflects the author’s views based on publicly available data and past market events. Readers are advised to conduct their own research or consult with a qualified financial advisor before making any investment decisions. Market conditions and outcomes may vary, and past performance is not indicative of future results.
