Moody’s Lowers U.S. Credit Outlook to “Negative”

Moody’s Downgrades U.S. Credit Rating

Moody’s on Friday downgraded its outlook on the U.S. credit rating to “negative” from “stable,” citing large fiscal deficits and a decline in debt affordability. This move drew immediate criticism from President Joe Biden’s administration.

Fitch’s Rating Downgrade

This comes after another ratings agency, Fitch, downgraded the sovereign rating earlier this year, following months of political tension around the U.S. debt ceiling.

Concerns for Investors

Federal spending and political polarization have raised concerns for investors, leading to a selloff that took U.S. government bond prices to their lowest levels in 16 years.

Impact on U.S. Economy

Christopher Hodge, the chief economist for the U.S. at Natixis, expressed concern over the lack of fiscal consolidation and the growing debt burden. He emphasized the challenges in reducing deficits and the increasing share of the budget taken up by interest costs.

Political Polarization and Fiscal Plan

The ratings agency highlighted “continued political polarization” in Congress as a risk, raising concerns that lawmakers may not be able to reach a consensus on a fiscal plan to address the decline in debt affordability.

Market Response

While Treasury yields have soared this year, Moody’s decision to change its outlook could exacerbate fiscal concerns. However, investors remain skeptical about its material impact on the U.S. bond market, which is considered a safe haven due to its depth and liquidity.

Impact on Biden’s Administration

The Moody’s move adds pressure on congressional Republicans to advance funding legislation to avert a partial government shutdown. This comes as Biden’s support has fallen sharply in the polls, with implications for the 2024 presidential election.

Contributions to Budget Deficits

Infighting among House Republicans has raised concerns about government shutdowns, with both parties contributing to budget deficits. Democrats have supported various spending plans, while Republicans implemented tax cuts early in Donald Trump’s presidency, adding to the deficit.