The downgrade lowers the federal government’s rating from Aaa to Aa1—a symbolic but significant shift that could ripple across financial markets. While Moody’s emphasized that the US still has "exceptional credit strengths," it warned that deficits are likely to grow even further, with few signs that lawmakers are willing or able to reverse course.
Why did Moody’s downgrade the US credit rating?
The backstory:
According to Moody’s, the downgrade was driven by an expected rise in federal deficits over the next decade—largely fueled by rising entitlement costs, higher interest payments on debt, and insufficient revenue.
In its statement, Moody’s said deficits are projected to climb from 6.4% of GDP in 2024 to nearly 9% by 2035. It also warned that extending former President Donald Trump’s 2017 tax cuts—currently a priority for the Republican-controlled House—could add $4 trillion to the deficit over the next ten years.
Political dysfunction also played a role. Moody’s cited successive administrations’ failure to address the debt, pointing to "rising political polarization" and a gridlocked Congress. Republicans have refused to consider tax increases, while Democrats have been reluctant to cut spending—leading to stalemates on major budget packages.
How does this affect you?
Why you should care:
When the US credit rating drops, it can affect the interest rates the government pays on its debt—costs that often trickle down to consumers and businesses.
If borrowing becomes more expensive for the federal government, the same could happen for households taking out mortgages, credit cards, or small business loans. A downgrade can also rattle financial markets, making investors more cautious and driving up the cost of borrowing across the board.
While the US still maintains a high credit rating, the shift from Aaa to Aa1 removes the symbolic "gold standard" status and could create uncertainty among global investors, particularly in times of economic stress.
Who else has downgraded the US?
Timeline:
Moody’s was the last of the three major credit rating agencies to issue a downgrade:2011: Standard & Poor’s cut the US rating amid debt ceiling fights in Congress
2023: Fitch Ratings followed with a downgrade, also citing political dysfunction
2025: Moody’s now joins them, making the US officially downgraded by all three
Despite the downgrade, all three agencies still classify the US as having a very strong ability to repay debt, and there is no indication of an immediate fiscal crisis.
What's next:
On Friday, House Republicans failed to advance a broad package of tax breaks and spending cuts, as hardline conservatives demanded deeper reductions to Medicaid and President Biden’s clean energy programs. Democrats opposed the cuts altogether.
Moody’s said the ongoing failure to pass meaningful fiscal reforms raises long-term concerns and could lead to additional pressures on the credit outlook.
Lawmakers on both sides of the aisle now face increasing scrutiny to find sustainable paths to address the deficit and stabilize the nation’s finances—though few signs of compromise have emerged
Culled from Fox10phoenix
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