Key Highlights :
Moody's on Friday changed its outlook on the U.S. credit rating to "negative" from "stable," citing large fiscal deficits and a decline in debt affordability. This follows a rating downgrade of the sovereign by another rating agency, Fitch, earlier this year, which came after months of political brinkmanship around the U.S. debt ceiling. The move has sparked criticism from top officials in President Joe Biden's administration, who have rejected the change and highlighted the U.S. economy's strength.
Moody's cited "continued political polarization within US Congress" as a major factor in the outlook change, noting that it raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability. Republicans who control the U.S. House of Representatives expect to release a stopgap spending measure on Saturday, aimed at averting 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 an AA+ rating since 2011. While it changed its outlook - indicating that a downgrade is possible over the medium term - Moody's affirmed its long-term issuer and senior unsecured ratings at 'Aaa' citing the U.S. credit and economic strengths. "The US' institutional and governance strength is also very high, supported in particular by monetary and macroeconomic policy effectiveness," it said.
White House spokesperson Karine Jean-Pierre said the change was "yet another consequence of congressional Republican extremism and dysfunction." Deputy Treasury Secretary Wally Adeyemo echoed that sentiment, saying, “While the statement by Moody’s maintains the United States’ AAA rating, we disagree with the shift to a negative outlook. The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.” Adeyemo highlighted the Biden administration's commitment to fiscal sustainability, including through over $1 trillion in deficit reduction measures included in a June agreement struck with Congress on raising the U.S. debt limit, and Biden’s proposal to reduce the deficit by nearly $2.5 trillion over the next decade.
It remains to be seen how the U.S. government will respond to Moody's outlook change and whether it will be able to take the necessary steps to prevent a downgrade of the U.S. credit rating. In the meantime, it is important for the government to continue to focus on fiscal sustainability and political consensus to ensure the long-term stability of the U.S. economy.