Moody's Downgrades U.S. Credit Rating Amid Escalating Debt Concerns

In May 2025, Moody's Investors Service downgraded the United States' sovereign credit rating from Aaa to Aa1, citing escalating government debt and rising interest expenses. This marks the first time in history that the U.S. does not hold the top rating from any of the three major credit agencies.

The downgrade reflects concerns over the nation's fiscal trajectory, with federal debt reaching unprecedented levels. As of March 6, 2025, the federal government debt stood at $36.56 trillion, surpassing the congressionally mandated debt ceiling of $36.1 trillion. The Congressional Budget Office (CBO) projects that, without policy changes, federal debt held by the public will rise from 98% of Gross Domestic Product (GDP) at the end of 2024 to 118% by 2035. Additionally, the CBO forecasts that interest payments on the national debt will nearly double, increasing from $952 billion in fiscal year 2025 to $1.8 trillion by 2035.

Moody's decision to downgrade the U.S. credit rating was influenced by the lack of consensus among U.S. administrations and Congress on reducing fiscal deficits and interest expenses. The agency projects that, without adjustments to taxes and spending, mandatory expenses, including interest, will rise from 73% of total spending in 2024 to 78% by 2035. Extending the 2017 Tax Cuts and Jobs Act could increase the federal deficit by $4 trillion over the next decade, with federal debt rising from 98% of GDP in 2024 to 134% in 2035.

The immediate impact of the downgrade was felt in financial markets. The yield on 30-year Treasury bonds rose to 5.03%, and the dollar decreased by 0.7% against a basket of currencies. Despite these fluctuations, the U.S. Treasury market remained relatively stable, with long-term bond rates and market volatility showing little change. Analysts suggest that markets had already priced in these issues, resulting in limited long-term impact.

The escalating national debt and budget deficits have significant social and economic implications. In fiscal year 2024, the government spent $882 billion on net interest, surpassing expenditures on national defense and Medicare. This growing interest burden limits the government's ability to fund essential programs and services. High levels of debt can crowd out private investment, potentially slowing economic growth. The CBO projects that economic growth and inflation will slow through 2026 and remain moderate thereafter. Without reforms, programs like Social Security and Medicare face financing gaps, potentially leading to reduced benefits or increased taxes.

This is not the first time the U.S. has faced credit rating downgrades. In 2011, Standard & Poor's downgraded the U.S. credit rating from AAA to AA+, citing concerns over political gridlock and fiscal policy. The current downgrade by Moody's reflects ongoing challenges in managing the nation's fiscal health.

The Government Accountability Office (GAO) recommends several strategies to address the fiscal challenges:

• Establish Fiscal Rules and Targets: Implement policies to address spending and revenue imbalances.
• Address Financing Gaps: Reform Social Security and Medicare to ensure long-term sustainability.
• Reduce Improper Payments: Enhance fraud risk management to minimize wasteful spending.
• Replace the Debt Limit: Adopt an approach linking debt decisions to spending and revenue decisions to avert the risk of government default.

The United States' escalating fiscal deficit and public debt pose significant challenges to economic stability and growth. The recent credit rating downgrade by Moody's underscores the urgency for comprehensive fiscal reforms to ensure the nation's long-term financial health.