Moody’s Investors Service has downgraded the United States’ long-term credit rating from Aaa (the highest possible) to Aa1, marking the first time the U.S. has lost its top rating from the last major agency that still held it. The outlook was shifted from negative to stable, signaling that while immediate further downgrades are unlikely, significant fiscal challenges remain.
Reasons for the Downgrade
Moody’s cited several interrelated factors for the downgrade:
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Rising National Debt: U.S. federal debt has ballooned to $36 trillion, with projections that it could reach 134% of GDP by 2035, up from 98% in 2024.
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Persistent Fiscal Deficits: The U.S. is running large annual deficits, expected to grow from 6.4% of GDP in 2024 to 9% by 2035.
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Escalating Interest Costs: Interest payments on the debt are projected to consume 30% of federal revenue by 2035, compared to 18% in 2024.
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Political Gridlock: Successive administrations and Congress have failed to agree on meaningful fiscal reforms or deficit reduction measures, with ongoing debates over extending tax cuts and increasing spending.
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Policy Uncertainty: Current legislative proposals, such as the so-called “Big Beautiful Bill,” include tax cuts and spending increases that could add trillions more to the debt if enacted.
Market and Economic Impact
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Investor Concerns: The downgrade has intensified worries about U.S. fiscal sustainability, with bond markets reacting to the prospect of higher deficits and borrowing costs.
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Rising Yields: Treasury yields have increased as investors demand higher returns to compensate for perceived fiscal risks, and the term premium on long-term debt has also risen.
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Global Implications: While the U.S. retains significant credit strengths-such as the size and resilience of its economy and the dollar’s role as the world’s reserve currency-the downgrade may complicate government borrowing and influence global financial markets.
Historical Context
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Moody’s was the last major rating agency to maintain a triple-A rating for U.S. sovereign debt. Standard & Poor’s downgraded the U.S. in 2011, and Fitch followed in 2023.
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The downgrade comes amid ongoing political debates over tax and spending policies, with little sign of consensus on how to address the nation’s long-term fiscal challenges.
Summary Table: U.S. Credit Rating Downgrades
| Agency | Year of Downgrade | Previous Rating | New Rating |
|---|---|---|---|
| Standard & Poor’s | 2011 | AAA | AA+ |
| Fitch Ratings | 2023 | AAA | AA+ |
| Moody’s | 2025 | Aaa | Aa1 |
A Turning Point in U.S. Fiscal Health
Moody’s downgrade of the U.S. credit rating from Aaa to Aa1 reflects mounting concerns over rising debt, persistent deficits, and political inaction on fiscal reform. The move has heightened market scrutiny of U.S. fiscal policy and could lead to higher borrowing costs for the government, with potential ripple effects across global markets.
