Moody's cuts US govt ratings over rising federal debt, interest payments

US-based ratings agency Moody's Ratings has downgraded the long-term issuer and senior unsecured ratings of the US government to “Aa1” from its previous “Aaa” levels, reported the news agency ANI on Saturday, May 17. 

According to the agency report, the ratings cut was a one-notch fall to the “Aa1” levels amid rising concerns over the nation's increasing federal debt and interest payments, which have increased over the past decade. Moody's has a 21-point ratings circle for its analysis.

The continuous failure in successive US administrations and Congress to agree on taking measures which are likely to reverse the trend of the large and persistent fiscal deficit has contributed to the ratings cut, as per the new report.

“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” said Moody's, cited in the agency report. 

The government is reportedly spending more while their revenues ae declining due to the tax cuts in the economy. This has resulted in the rising fiscal deficit and debt levels in the nation.

According to Moody's expectation, the US will continue to run with large deficits in the next ten years, as entitlement spending increases and revenue growth remains flat, as cited by the news agency.

The Tax Cuts and Jobs Act of 2017 is extended as Moody's expects it is likely to add $4 trillion to the federal primary deficit in the next ten years. The mandatory spending, including the interest, is projected to make up to 78 per cent of the total federal spending by 2035, compared to 73 per cent levels in 2024, as per the report. 

Moody's outlook for US economy

Even though the US-based Moody's cut the ratings, the firm also assigned a stable outlook for the nation, citing balanced risks at the “Aa1” levels due to the credit strengths which support the US economy. These credit strengths include large size, resilience, high average incomes, and strong track record of innovation, according to the agency report.

Moody's anticipates that the US will maintain its institutional strengths, including the constitutional separation of powers and an effective, independent monetary policy led by the Federal Reserve.

If the US government returns to fiscal discipline through increased revenues or reduced spending, it can lead to a ratings upgrade or hike in the future.

Moody's also cited that the US dollar is still the world's dominant reserve currency, which provides the US government with strong backing despite the high fiscal deficit in the economy. According to the news agency's report citing the ratings firm, it is unlikely to find any credible alternative to the US dollar as a global reserve currency. 

Read all US Economy-related news here