Moody’s has downgraded the U.S. credit rating outlook from “stable” to “negative” due to fiscal deficits and a decline in debt affordability. This decision has been criticized by President Joe Biden’s administration. Fitch, another ratings agency, had previously downgraded the sovereign rating earlier this year. The concerns over federal spending and political polarization have contributed to a selloff in U.S. government bond prices. Christopher Hodge, the chief economist for the U.S. at Natixis, agrees with the rationale behind the downgrade, stating that deficits will remain large and the debt burden will continue to grow.
Moody’s statement highlights the risk of continued political polarization in Congress, which could hinder the ability to reach a consensus on a fiscal plan to address the decline in debt affordability. Republicans in control of the U.S. House of Representatives are expected to release a stopgap spending measure to avoid a government shutdown.
Moody’s is now the only major rating agency to maintain a top rating for the U.S. government. Fitch and S&P have both downgraded their ratings in recent years. Despite the outlook change, Moody’s has affirmed the long-term issuer and senior unsecured ratings at ‘Aaa’, citing U.S. credit and economic strengths.
The White House spokesperson attributes the change in outlook to “congressional Republican extremism and dysfunction.” However, Deputy Treasury Secretary Wally Adeyemo disagrees with the shift to a negative outlook, stating that the American economy remains strong and Treasury securities are still considered safe and liquid assets. Adeyemo highlights the Biden administration’s commitment to fiscal sustainability and deficit reduction measures.
The rise in Treasury yields this year, driven by expectations of tight monetary policy and U.S.-focused fiscal concerns, has put additional pressure on U.S. debt affordability. Moody’s acknowledges this sharp rise in yields. However, yields have recently reversed some of their gains.
While a Moody’s downgrade could exacerbate fiscal concerns, investors believe it would have a limited impact on the U.S. bond market, which is considered a safe haven due to its depth and liquidity. Nevertheless, the downgrade serves as a reminder of the potential for government shutdown and its impact on the markets.
Moody’s decision comes at a time when President Biden’s support has fallen sharply in the polls, particularly in battleground states. This adds pressure on congressional Republicans to advance funding legislation and avoid a partial government shutdown. Both parties have contributed to budget deficits, with Democrats supporting various spending plans and Republicans implementing tax cuts.
In conclusion, Moody’s downgrade of the U.S. credit rating outlook to “negative” reflects concerns over fiscal deficits and debt affordability. The decision has drawn criticism from the Biden administration. The political polarization and federal spending have contributed to a selloff in U.S. government bond prices. While the downgrade could have implications, the U.S. bond market is still seen as a safe haven. The decision also adds pressure on congressional Republicans to address funding legislation and avoid a government shutdown. Both parties have contributed to budget deficits, and President Biden’s falling support in the polls further complicates the situation.
