Moody’s has lowered the U.S. credit rating to Aa1, citing the ongoing rise in public debt and the increasing cost of servicing that debt in today’s high-rate environment. This move means the U.S. has officially lost its last AAA rating, after similar downgrades by S&P in 2011 and Fitch in 2023.
While the news highlights growing fiscal concerns, it’s not entirely unexpected: the federal deficit now exceeds $2 trillion per year, and interest payments already absorb 18% of tax revenues.
So far, markets have reacted calmly, with a few key takeaways:
- Rates and investments: No major sell-off of Treasury bonds is expected, though yields might rise slightly, similar to what happened after Fitch’s downgrade. If volatility spikes, the Fed could step in.
- Equities: The impact on stock markets may be muted, since all three major rating agencies have now issued downgrades. Investors remain more focused on trade policies and tariffs.
- Credit confidence: Despite the downgrade, the U.S. retains strong credit fundamentals, backed by a deep capital market, the dollar as the world’s reserve currency, and strong repayment capacity.
What this means for markets:
While the short-term impact is likely limited, persistent fiscal imbalances could pose long-term risks for financial markets.
U.S. Federal Deficit and Net Interest Payments (% of GDP, 1973–2035)
*TCJA refers to the Tax Cuts and Jobs Act of 2017.
Source: JP Morgan.
