President Trump said new import tariff rates will soon arrive
During his Gulf trip, President Trump said his administration would send a letter to the country notifying him of new tariff charges.
Moody’s rating reduced the country’s credit rating by 1 notch from AAA to AA1, with the US government notching the highest among the major rating agencies.
Moody’s cited debt and interest rates “are significantly higher than the similarly valued sovereigns.”
“All US administrations and Congress have not agreed to measures to reverse the trend of massive annual fiscal deficits and interest growth,” Moody’s said in a news release Friday. “US fiscal performance could be worse when compared to other highly rated sovereignty compared to its own past.”
For our consumers, a low rating can lead to higher borrowing costs.
Why did Moody’s downgrade the US?
The switch came after the Fitch rating downgraded the country from AAA to AA+ in 2023. In 2011, Standard & Poor’s downgraded the country’s credit rating.
Moody’s cites federal debt that has risen “sharply” due to the ongoing fiscal deficit due to increased federal spending and reduced government revenues due to tax cuts.
The agency said the latest draft tax bill from the GOP would add around $4 trillion to the federal primary deficit over the next decade, and said it did not believe the proposal would lead to “significant annual reductions in forced spending and deficits.”
The federal deficit is expected to grow from 6.4% of GDP in 2024 to 9% by 2035. This is driven by increased interest on debt, increased qualification expenditures and relatively low revenue generation.
Moody’s has a stable outlook from negative to stable
The agency also changed from negative to stability to reflect “balanced risks in AA1.” This points to the country’s “holding exceptional credit strength, such as economic size, resilience, and dynamism, and the role of the US dollar as a global reserve currency.
And despite policy uncertainty over the past few months, Moody’s hopes the US will continue its “long history of highly effective monetary policy” led by the independent Federal Reserve.
How does downgrade affect consumers?
A decline in rating could raise Treasury bond rates, increase government borrowing costs, and further increase federal debt. Additionally, as reported previously by USA Today, the Treasury Department has affected interest rates on assets such as 30-year fixed mortgages and corporate bonds, lower credit ratings could boost consumer borrowing costs.
“For investors, this downgrade may feel more symbolic than practical. There will be no significant increase in Treasury yields after the announcement. U.S. debt demand remains strong.” “However, the long-term impact is clear. Continuous financial expansion without reliable efforts to stabilize debt could ultimately affect borrowing costs and economic flexibility.”
Contribution: Reuters
