Ratings firm Moody's recently downgraded its assessment of the U.S. credit outlook from "stable" to "negative," indicating America's worsening fiscal standing and the implications of political dysfunction. Despite the downgrade, Moody's maintained the U.S.'s highest rating of AAA, but warned that the rating could potentially slip in the future.
This development comes against the backdrop of a highly polarized political environment, characterized by infighting among House Republicans that has paralyzed Congress and an increasing debt load. Earlier this year, the U.S. faced the risk of defaulting on its debt after Republicans refused to raise the debt ceiling unless their demands for budget cuts were met by Democrats. The ongoing failure to pass a budget has also increased the likelihood of a government shutdown next week.
Moody's assessment reflects its lack of confidence in the U.S.'s ability to address these political issues, which pose a threat to the country's ability to meet its debt obligations.
This news follows a similar downgrade by Fitch, another ratings firm, which lowered the U.S. credit rating from AAA to AA+ in August. S&P Global Ratings also downgraded the U.S. credit rating in 2011 during a previous debt limit fight. These downgrades reflect a decreased confidence in the government's ability to repay its debts, largely due to political dysfunction.
The impact of Moody's downgrade on the economy remains to be seen. After Fitch's downgrade in August, the stock market experienced immediate losses, with the Nasdaq Composite falling 2.2%, the S&P 500 falling 1.4%, and the Dow Jones Industrial Average falling 0.9%. However, experts suggest that the effects of this downgrade may not be as significant as the first downgrade in 2011.
There are concerns that downgrades in the credit rating could lead to increased interest rates on mortgages and credit cards, as lenders perceive the federal government as riskier. If the U.S. were to default on its debts, it could have catastrophic consequences for the economy, including damage to the government's reputation, potential inability to pay employees and provide vital services, and a ripple effect that could trigger a recession.
The White House press secretary attributed Moody's decision to "congressional Republican extremism and dysfunction," while House Speaker Mike Johnson (R-La.) blamed President Biden and Democrats' "reckless spending agenda."