Moody’s Cuts U.S. Rating Outlook Amid Deficit Concerns and Political Polarization

November 11, 2023

The U.S. may be at risk of losing its last perfect credit rating after Moody’s Investors Services changed the outlook for the nation’s debt from “stable” to “negative.”

While the move does not automatically mean the credit rating agency will downgrade the nation’s AAA rating, it does increase the chances. The prospect of a downgrade could have far-reaching impacts, potentially hurting Americans’ investment portfolios, making borrowing more expensive, and increasing costs for the government to service its debts.

In a statement, the ratings agency said that “continued political polarization” in Congress raises the risk that lawmakers “will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”

”In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’s fiscal deficits will remain very large, significantly weakening debt affordability,” the statement said.

Moody’s is the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from AAA to AA+ amid August’s debt ceiling standoff, joining S&P, which downgraded the U.S. to AA+ during a previous fiscal cliff standoff in 2011.

While the change in outlook does indicate a downgrade is possible over the medium term, Moody’s affirmed its long-term issuer and senior unsecured ratings at AAA, citing U.S. credit and economic strengths.

U.S. debt has long been considered the safest of safe harbors for investors, but the recent downgrades suggest that this status could be in question. A downgrade would likely cause U.S. Treasury yields to climb as investors see more risk in lending money to the U.S. government.

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