Moody’s Lowers U.S. Credit Rating Outlook to Negative
Moody’s, the credit rating agency, has lowered its outlook on the U.S. credit rating from stable to negative. The agency cited large fiscal deficits and a decline in debt affordability as reasons for the downgrade. This move comes after another ratings agency, Fitch, also downgraded the U.S. sovereign rating earlier this year. The ongoing political polarization and federal spending have raised concerns among investors and contributed to a selloff in U.S. government bond prices. The ratings agency warns that continued political polarization in Congress raises the risk of not being able to reach a consensus on a fiscal plan to slow down the decline in debt affordability.
Concerns Over Fiscal Consolidation
Economists and analysts agree with Moody’s rationale for the downgrade. Christopher Hodge, chief economist for the U.S. at Natixis, states that there is no reasonable expectation for fiscal consolidation any time soon. Deficits will remain large, and as interest costs take up a larger share of the budget, the debt burden will continue to grow. William Foster, a senior vice president at Moody’s, notes that significant policy responses to this declining fiscal strength are unlikely to happen until 2025 due to the political calendar next year.
Republican Efforts to Avert Government Shutdown
Republicans, who control the U.S. House of Representatives, plan to release a stopgap spending measure to avoid a partial government shutdown when current funding expires. Moody’s is the last of the three major rating agencies to maintain a top rating for the U.S. government, with Fitch and S&P having downgraded the rating earlier. While Moody’s changed its outlook to negative, it affirmed the long-term issuer and senior unsecured ratings at ‘Aaa’ citing U.S. credit and economic strengths.
Biden Adminstration’s Response
The Biden administration criticized the change in outlook by Moody’s, attributing it to congressional Republican extremism and dysfunction. Deputy Treasury Secretary Wally Adeyemo defended the strength of the American economy and stated that the administration remains committed to fiscal sustainability. Adeyemo highlighted the deficit reduction measures and proposed plans to reduce the deficit in the next decade. Treasury yields have risen this year, reflecting expectations of tight monetary policy by the Federal Reserve and concerns about U.S. fiscal issues.
Impact on Financial Markets
While a Moody’s downgrade could exacerbate fiscal concerns, investors believe it would not have a material impact on the U.S. bond market. The U.S. bond market is seen as a safe haven because of its depth and liquidity. However, there are concerns that the clock is ticking and the markets are moving closer to the possibility of another government shutdown. The Moody’s decision puts pressure on congressional Republicans to advance funding legislation and avert a partial government shutdown.
Political Implications for Biden
The Moody’s downgrade comes at a time when President Joe Biden’s support in the polls has fallen sharply. A New York Times/Siena poll showed him trailing former President Donald Trump in several battleground states. The outcome in these states could determine the outcome of the next presidential election. The Moody’s move also puts pressure on congressional Republicans to reign in spending and address the rising national debt.
The Moody’s downgrade of the U.S. credit rating outlook to negative highlights the challenges of fiscal deficits and debt affordability. The ongoing political polarization and federal spending have raised concerns among investors. The Biden administration has defended the strength of the American economy and its commitment to fiscal sustainability. However, there are concerns about the possibility of another government shutdown. The Moody’s decision underscores the need for bipartisan agreement on fiscal plans to address the declining debt affordability.