Moody’s Ratings downgraded the United States’ long-term issuer and senior unsecured ratings from Aaa to Aa1, marking the first time the U.S. has lost its top-tier credit rating from all three major credit rating agencies—Moody’s, Standard & Poor’s (S&P), and Fitch Ratings.

This downgrade, driven by over a decade of rising government debt, increasing interest payments, and persistent fiscal deficits, has sparked significant political and economic reactions.

While the U.S. retains exceptional economic strengths, the downgrade signals concerns about fiscal sustainability and could lead to higher borrowing costs.

This report compiles insights from multiple news sources to analyze the reasons, implications, and responses to this historic downgrade.

Moody’s had maintained a triple-A (Aaa) rating for the U.S. since 1917, making it the last major agency to downgrade the nation’s credit rating.

S&P downgraded the U.S. from AAA to AA+ in 2011 following a debt ceiling crisis, and Fitch followed suit in 2023, citing fiscal deterioration and political brinkmanship.

Moody’s had warned of a potential downgrade in November 2023, changing its outlook to negative due to large fiscal deficits and declining debt affordability.

The May 2025 downgrade reflects a continuation of these concerns, exacerbated by recent policy debates and economic conditions.

Moody’s cited several key factors for the downgrade:

1. Rising Government Debt: Over the past decade, U.S. federal debt has increased significantly, reaching 98% of GDP in 2024 and projected to climb to 134% by 2035. This level is notably higher than other Aa1-rated sovereigns.

2. Increasing Interest Payments: Interest payments on federal debt have risen sharply, accounting for 9% of revenue in 2021 and projected to reach 30% by 2035. This growing burden strains fiscal flexibility.

3. Persistent Fiscal Deficits: Federal deficits are expected to widen, reaching 9% of GDP by 2035 from 6.4% in 2024, driven by rising entitlement spending and relatively low revenue generation.

4. Policy Concerns: Moody’s highlighted the lack of concerted efforts to curb spending and the potential fiscal impact of extending the 2017 tax cuts, estimated to add $4 trillion to the federal deficit over the next decade.

5. Political Dysfunction: Successive administrations and Congress have failed to agree on measures to reverse fiscal trends, with political polarization exacerbating fiscal risks.

Despite the downgrade, Moody’s shifted its outlook from negative to stable, acknowledging the U.S.’s “exceptional credit strengths,” including its $85,812 GDP per capita (2024), the dollar’s status as the global reserve currency, and effective monetary policy led by an independent Federal Reserve.

The downgrade has raised concerns about potential economic ripple effects:

• Borrowing Costs: A lower credit rating could prompt investors to demand higher yields on U.S. Treasury securities, increasing borrowing costs for the government and potentially for consumers.

  However, past downgrades by S&P and Fitch had limited immediate impact, as U.S. debt remains a cornerstone of the global financial system.

• Market Reactions: On May 16, 2025, U.S. stocks declined, with the S&P 500 ETF (SPY) falling 1% and the Invesco QQQ Trust (QQQ) dropping 1.3% in after-hours trading. Treasury yields rose, and Treasury futures hit session lows, reflecting market unease.

• Long-Term Risks: Analysts warn that continued fiscal irresponsibility could lead to sustained higher borrowing costs for both public and private sectors, potentially destabilizing the economy.

  Spencer Hakimian, CEO of Tolou Capital Management, noted, “The downgrade is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs.”

Darrell Duffie, a Stanford University finance professor and former Moody’s board member, emphasized that the downgrade reinforces evidence of excessive U.S. debt, though he questioned whether policymakers would act decisively.

Political Reactions

The downgrade has fueled partisan debates:

• White House Response: The Trump administration dismissed Moody’s decision, with Communications Director Steven Cheung criticizing Moody’s chief economist, Mark Zandi, for past Democratic affiliations.

  The White House blamed former President Joe Biden and congressional Democrats for “spending that piled on our national debt, fueled runaway inflation, and forced the Fed to raise interest rates.” It touted plans to address fiscal issues through “The One, Big, Beautiful Bill” to cut government waste.

• Democratic Response: Senate Minority Leader Chuck Schumer called the downgrade a “wake-up call” for Republicans to abandon “deficit-busting tax giveaways.” He accused the GOP of neglecting fiscal responsibility.

• Policy Context: The downgrade coincides with debates over President Trump’s proposed tax and spending plans, including extending the 2017 tax cuts and imposing tariffs.

  Moody’s warned that these policies could deepen the fiscal deficit, while recent tariff policies have sparked investor concerns about inflation and economic slowdown.