Moody's Ratings downgrade from Aaa to Aa1
- Stephen H Akin
- May 19
- 5 min read
Updated: May 23
Moody's Ratings (Moody's) has downgraded the Government of United States of America's (US) long-term issuer and senior unsecured ratings to Aa1 from Aaa and changed the outlook to stable from negative.
Treasury Secretary Scott Bessent played down worries about Friday’s U.S. credit downgrade by Moodys.
Ratings, telling NBC News ratings are a “lagging indicator” and blaming federal spending during the previous administration.
“I think that Moody’s is a lagging indicator,” Bessent told NBC’s Meet the Press with Kristen Welker. Moody’s cited the possible extension of President Donald Trump’s 2017 Tax Cuts and Jobs Act in its credit downgrade, saying that move would add around $4 trillion to the deficit over the next decade.
“We didn’t get here in the past 100 days,” Bessent said. “It’s the Biden administration and the spending that we have seen over the past four years that we inherited.”
A ratings agency assesses the creditworthiness of an issuer - that could be a sovereign or a corporate - and assigns a credit rating to the bonds they issue.
Typically, ratings use a letter system run that from AAA for effectively risk-free issuers, to D, for an issuer actively in default.
Ratings are ranked under two tiers: investment grade and high-yield, or junk. The higher the credit rating, the lower the premium that investors demand to hold those bonds, therefore, the lower the interest rate an issuer pays on that debt.
The agencies assess factors including debt, economic growth projections and the strength of independent institutions.
Three main agencies Moodys, Standard & Poor's and Fitch have dominated. Others, including Morningstar DBRS and Scope, have gained more prominence in the last decade.
RATIONALE FOR THE RATINGS DOWNGRADE TO Aa1
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability. Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks at Aa1. A number of credit strengths offer resilience to shocks.
The US economy is unique among the sovereigns we rate. It combines very large scale, high average incomes, strong growth potential and a track-record of innovation that supports productivity and GDP growth. While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US' long-term growth will be significantly affected.
In addition, the US dollar's status as the world's dominant reserve currency provides significant credit support to the sovereign. The credit benefits of the dollar are wide-ranging and provide the extraordinary funding capacity that helps the government finance large annual fiscal deficits and refinance its large debt burden at moderate and relatively predictable costs. Despite reserve diversification by central banks globally over the past twenty years, we expect the US dollar to remain the dominant global reserve currency for the foreseeable future.
Underpinning the rating is our assumption that the US' institutions and governance will not materially weaken, even if they are tested at times. In particular, we assume that the long-standing checks and balances between the three branches of government and respect for the rule of law will remain broadly unchanged. In addition, we assess that the US has capacity to adjust its fiscal trajectory, even as policy decision-making evolves from one administration to the next.
Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions. Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.
Read the full text from MOODYS:
US Treasury Shocks With Second Biggest Budget Surplus In History
The impact of large individual tax deposits resulted in budget receipts of $850 billion and a surplus of $258 billion. April contains the due date for final payments of prior year liability and the first installment of quarterly estimated taxes for most individuals and businesses.
Download the Full Report:
Treasury Secretary Scott Bessent Remarks on Bretton Woods
In the final months of World War II, Western leaders convened the greatest economic minds of their generation. Their task? To build a new financial system.
At a quiet resort high up in the mountains of New Hampshire, they laid the foundation for Pax Americana.
The architects of Bretton Woods recognized that a global economy required global coordination. To encourage that coordination, they created the IMF and the World Bank.
These twin institutions were born after a period of intense geopolitical and economic volatility. The purpose of the IMF and the World Bank was to better align national interests with international order, thereby bringing stability to an unstable world.
In short, their purpose was to restore and preserve balance.
This remains the purpose of the Bretton Woods institutions. Yet everywhere we look across the international economic system today, we see imbalance.
The good news: it doesn’t have to be this way. My goal this morning is to outline a blueprint to restore equilibrium to the global financial system and the institutions designed to uphold it.
I have spent the bulk of my career from the outside looking in on financial policy circles. Now I am on the inside looking out. And I am eager to work with each of you to restore order to the international system. To achieve this, however, we must first reconnect the IMF and World Bank with their founding missions.
The IMF and World Bank have enduring value. But mission creep has knocked these institutions off course. We must enact key reforms to ensure the Bretton Woods institutions are serving their stakeholders—not the other way around.
Bringing balance back to global finance will require clear-eyed leadership from the IMF and World Bank. This morning, I will explain how they can provide that leadership to build safer, stronger, and more prosperous economies all around the world. I wish to invite my international counterparts to join us in working toward these goals.
On this point, I wish to be clear: America First does not mean America alone. To the contrary, it is a call for deeper collaboration and mutual respect among trade partners.
Far from stepping back, America First seeks to expand U.S. leadership in international institutions like the IMF and World Bank. By embracing a stronger leadership role, America First seeks to restore fairness to the international economic system.
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