Moody’s Downgrades U.S. Credit Rating Over Soaring Debt and Tax Policy Uncertainty

16 May 2025

ANGELA WEISS | AFP

Moody’s Investors Service has officially downgraded the United States’ credit rating from its long-held AAA to AA1, a historic decision that underscores growing concerns over the nation’s mounting debt and widening fiscal deficits. It marks the first time since 1917 that the U.S. has not held a perfect rating from all three major credit agencies.

The downgrade was triggered by projections that federal deficits could swell to 9% of GDP by 2035 if current trends continue. Alarmingly, interest payments on U.S. debt now outpace defense spending and are projected to consume nearly one-third of the entire federal budget within the next decade. The downgrade has intensified pressure on policymakers to address long-term fiscal imbalances.

Much of the current concern revolves around former President Donald Trump’s proposed economic legislation, often referred to as the "One Big Beautiful Bill." This ambitious plan seeks to extend and expand the 2017 tax cuts, add new deductions for families and small businesses, and offer tax relief for caregivers and first responders. While Republicans argue the plan will spur economic growth and job creation, economists warn it could add up to $2.4 trillion to the national debt over the next ten years.

The bond markets have reacted swiftly. Yields on long-term U.S. Treasury bonds have surged, crossing 5% for 30-year bonds for the first time in nearly two decades, as investors grow increasingly cautious about America’s fiscal outlook. A higher yield indicates greater risk and will ultimately increase the cost of borrowing for the federal government, potentially squeezing funding for key programs.

This development has rattled financial markets and prompted sharp criticism from economists and international investors. Many warn that without significant reform, either through tax increases, spending cuts, or both, the U.S. could face further downgrades and a fiscal crisis that might erode the country’s global economic leadership.

For now, Moody’s outlook on the U.S. remains "negative," suggesting that further downgrades could occur if no meaningful changes are made to reduce deficits and control interest costs. As political gridlock continues in Washington, the nation’s economic credibility hangs in the balance.