Ratings agency Moody’s on Friday downgraded its outlook on the U.S. credit rating from stable to negative, citing a large budget deficit and lower levels of debt sustainability.
The decision drew immediate criticism from President Joe Biden’s administration.
“Although Moody’s has maintained the United States’ AAA rating, we do not agree with the change to a negative outlook,” said Treasury Undersecretary Wally Adeyemo. “The US economy remains strong and Treasury securities are the safest and most liquid asset.”
Treasury yields have risen sharply this year amid expectations that the Federal Reserve will continue to tighten monetary policy.
At the same time, Moody’s considered that the sharp rise in Treasury yields “increased existing pressure on the sustainability of US debt.”
White House Press Secretary Karine Jean-Pierre, in turn, immediately after the Moody’s news, said that the deterioration of the US rating outlook was “another consequence of Republican extremism and dysfunction in Congress”.
Earlier this year, ratings agency Fitch downgraded the United States’ credit rating, following months of political standoff over the U.S. debt ceiling.
Federal spending and political polarization in the United States are a growing concern for investors, driving US Treasury bond prices to their lowest level in 16 years.
“It’s hard to disagree with Moody’s reasoning, as there is no reasonable fiscal consolidation on the horizon for the United States,” said Christopher Hodge, chief U.S. economist at investment bank Natixis.
“The deficit will remain large (if not widen), and as debt interest costs absorb a greater proportion of the budget, the debt burden will grow,” Hodge said.
Moody’s said “continued political polarization” in Congress increases the risk that lawmakers will fail to reach a consensus on a fiscal plan to stem the decline in debt sustainability.
Moody’s is the last of the three major rating agencies to maintain the highest credit rating for the United States. Fitch downgraded the rating from AAA to AA+ in August, and S&P set it at AA+ in 2011.
