Moody’s Lowers Outlook on US Debt

Moody’s Investors Service lowered its outlook on the U.S. government's debt Friday, citing the cost of rising interest rates and political polarization in Congress.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.'s fiscal deficits will remain very large, significantly weakening debt affordability,” the agency said in a statement.

The credit rating agency retained its top AAA credit rating on the debt, but changing the outlook to “negative” from “stable" raises the risk that Moody's could eventually strip the rating as well. Fitch Ratings lowered its rating to AA+ from AAA in August, and Standard & Poor's downgraded the U.S. in 2011.

A lower rating on U.S. debt could cost taxpayers if borrowers end up demanding higher interest rates on Treasury bills and notes. The yield on the 10-year Treasury has risen sharply since July, jumping to 4.6% from about 3.9%.

The Fitch downgrade in August may have contributed to that increase, according to some market analysts, though most point to other factors as bigger drivers, such as the Federal Reserve's commitment to keeping its benchmark rate at a 22-year high in order to battle inflation.

The Biden administration criticized Moody's decision.

“While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook,” said Deputy Treasury Secretary Wally Adeyemo. “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”

The federal government's budget deficit jumped to $1.7 trillion in the budget year that ended Sept. 30, up from $1.38 trillion the previous year. Analysts have warned that with interest rates heading higher, interest costs on the national debt will eat up a rising share of tax revenue.

Separately, congressional lawmakers left Washington for the weekend without a plan to avoid a potential government shutdown that could occur by Nov. 17.

Moody's cited Congressional dysfunction as one reason it lowered its outlook.

“Recently, multiple events have illustrated the depth of political divisions in the U.S.: Renewed debt limit brinkmanship, the first ouster of a House Speaker in U.S. history, prolonged inability of Congress to select a new House Speaker, and increased threats of another partial government shutdown,” Moody's said.