What Credit Rating Cut Means for America's Economy

Newsweek

22-05-2025

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
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On May 16, Moody's lowered the U.S.'s credit rating from "Aaa" to "Aa1," stripping the country of the perfect score held since 1917 and casting an even brighter spotlight on Washington's long-running fiscal troubles.
"Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's wrote in its assessment. "We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
"The U.S.'s fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns," it added.
Photo-illustration by Newsweek/Getty
The White House has brushed aside the downgrade, describing it as largely symbolic and dismissing both the lagging indicator and the rater. The administration denies that the U.S. possesses anything other than strong fiscal footing and top-shelf creditworthiness.
Treasury Secretary Scott Bessent told CNN that he did not "put much credence" in Moody's rating and that the "trillions of dollars" coming into the U.S. thanks to President Donald Trump's recent Middle East tour was an encouraging enough signal of investor confidence and economic health.
White House Communications Director Steven Cheung called Mark Zandi, Moody's chief economist, a "Never Trumper" who had "been proven wrong time and time again."
"When you look at the world, the world has confidence in the United States of America and our economy," press secretary Karoline Leavitt said when asked to respond to the credit rating cut.
"So there's a lot of optimism in this economy, and the president disagrees with that assessment," she added.
Economists have told Newsweek that while the downgrade itself does not spell any new concerns for the American economy beyond potentially weakening already shaky market confidence, the conditions that prompted Moody's decision have long shadowed over the country's fiscal trajectory.
What Does This Mean for the US Economy?
With the downgrade, Moody's joins the other two major credit rating agencies—Fitch and S&P—that withdrew the U.S.'s perfect rating in 2023 and 2011, respectively.
In its assessment, Moody's acknowledged that the U.S. "retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency." However, it said the decision to downgrade was based on the U.S.'s ballooning federal debt, which had helped push the deficit to a staggering $36 trillion.
"It is appropriate, I think, to downgrade the U.S. debt, given the size of current debt and deficits," said William Gale, the chair in federal economic policy at the Brookings Institution and a co-founder of the Tax Policy Center.
More significant, he told Newsweek, was the "implied disregard" for addressing these issues, exemplified by the current budget—the "one big, beautiful bill"—being advanced by Republican House leadership with the support of Trump.
The reconciliation bill in its current form includes a multitrillion-dollar hike to the nation's debt ceiling, an extension of Trump's 2017 tax cuts—with a view to making these permanent—and spending cuts that do little to offset these reductions in federal inflows.
"If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade," Moody's wrote on Friday.
The GOP has not secured unanimous support for the bill in either chamber, the primary holdouts being fiscal hawks concerned about the unavoidable and significant increases to the deficit that would occur.
President Donald Trump speaking to the press, with Speaker of the House Mike Johnson behind him, following a House Republican meeting at the U.S. Capitol in Washington, D.C., on May 20.
President Donald Trump speaking to the press, with Speaker of the House Mike Johnson behind him, following a House Republican meeting at the U.S. Capitol in Washington, D.C., on May 20.The White House has denied that the bill will add to the deficit, even as independent experts and budget watchdogs offer a conflicting assessment.
Gale said the bill would add to the risks posed by a ballooning debt "in every way." He added that if interest rates surpass economic growth, "then we are in for a particularly rocky ride, as the debt/GDP burden will start to spiral upward."
"We have the resources to cover our debt over the near term, and the long-term outlook is addressable provided politicians are willing to make some harder choices," said John Canavan, a lead financial market analyst at Oxford Economics. "The current reconciliation bill working through Congress suggests that politicians aren't yet prepared to make those choices."
The Committee for a Responsible Federal Budget (CRFB) estimates that the reconciliation bill will add "roughly $3.3 trillion" to the national debt. "We should not pass any legislation that will add to deficits until we improve our fiscal situation, and the current form of the bill would—even after accounting for growth," Maya MacGuineas, the president of the CRFB, told Newsweek.
MacGuineas said Moody's announcement wouldn't "be a tipping point" as the information on which it was based was already known to investors. However, she added that it would contribute to "higher interest rates and market gyrations," which in turn have "a negative effect on growth."
Interest rates rose following Moody's announcement, the BBC reported, briefly surpassing 5 percent to reach their highest level since October 2023. The CFRB projected that the U.S. would pay close to $1 trillion in interest on its national debt in 2025, almost triple 2020 levels and surpassing the country's world-leading defense budget of $850 billion.
"We are now at the point with interest payments larger than spending on national defense. That makes us highly vulnerable in terms of geopolitics and national security," MacGuineas said. "Unfortunately, it is not an exaggeration to say that over time it will undermine our role as a superpower, as it has to other countries in the past."