Moody’s on Friday changed its outlook on the United States’ credit rating from “stable” to “negative,” citing large fiscal deficits and a decline in debt affordability.
The move follows a sovereign rating downgrade by another ratings agency, Fitch, earlier this year, which came after months of brinkmanship over the U.S. debt ceiling.
“Continued political polarization within the US Congress increases the risk that successive administrations will be unable to reach consensus on a fiscal plan to curb declining debt affordability,” Moody’s said in a statement.
Republicans who control the House of Representatives hope to release a stopgap spending measure on Saturday, aimed at avoiding a partial government shutdown by keeping federal agencies open when current funding expires next Friday.
Moody’s is the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from triple A to AA+ in August, joining S&P, which has had an AA+ rating since 2011.
While changing its outlook (indicating a downgrade is possible in the medium term), Moody’s affirmed its long-term issuer and senior unsecured debt ratings at ‘Aaa’, citing US economic and credit strengths.
“The institutional and governance strength of the United States is also very high, supported in particular by the effectiveness of monetary and macroeconomic policies,” he said.
Senior officials in President Biden’s administration rejected the move.
White House spokeswoman Karine Jean-Pierre said the change was “yet another consequence of congressional Republican extremism and dysfunction.”
“While Moody’s statement maintains the United States’ AAA rating, we do not agree with the change to a negative outlook. “The U.S. economy remains strong and Treasury securities are the world’s leading safe and liquid asset,” Treasury Undersecretary Wally Adeyemo said in a statement.
Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through more than $1 trillion in deficit reduction measures included in a deal reached in June with Congress to raise the U.S. debt limit. , and Biden’s proposal to reduce the deficit by almost $2.5 trillion over the next decade.
The change in outlook comes at a volatile time for the bond market. Treasury yields have soared in recent months to 16-year highs on expectations that the Federal Reserve will maintain tight monetary policy as well as fiscal concerns focused on the United States.
“The sharp rise in US Treasury yields this year has increased pre-existing pressure on the affordability of US debt,” Moody’s said.
Yields, which move inversely to bond prices, have reversed some of the gains in recent weeks.
“It’s a reminder that the clock is ticking and markets are getting closer to understanding that we could enter another period of drama that could ultimately lead to a government shutdown,” said Quincy Krosby, chief global strategist at LPL Financial. .
