Moody’s downgrades US credit ratings from AAA to AA1: What does it mean?

Moody’s Ratings downgraded the United States’ long-term issuer and senior unsecured ratings from Aaa to Aa1 on Friday, marking the first time the US has lost its top credit rating from the last major agency holding it. 

Moody’s downgraded US debt on Friday(AFP)

The outlook shifted to stable from negative, reflecting fiscal challenges driven by over a decade of rising government debt and interest costs. This comes days after the April CPI report showed an easing of inflation in the aftermath of President Donald Trump’s tariff policies. This downgrade, detailed in Moody’s press release, highlights weakening debt affordability compared to other highly rated parties. 

What does the downgrade to AA1 mean?

Moody’s downgrade of the US debt to Aa1 signals reduced confidence in US creditworthiness, reflecting concerns like rising deficits, increasing debt-to-GDP ratios, and political gridlock over debt ceiling and fiscal policy.

The downgrade stems from continuous large fiscal deficits, projected to reach 9% of GDP by 2035 from 6.4% in 2024. 

Federal debt is expected to climb to 134% of GDP by 2035, up from 98% in 2024, Moody’s stated. The interest payments, meanwhile, could consume 30% of revenue, compared to 18% in 2024.

 Moody’s cites the failure of successive administrations and Congress to enact reforms, such as reversing the 2017 Tax Cuts and Jobs Act, which could add $4 trillion to deficits over the next decade if extended.

“Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions. Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles,” Moody’s stated. 

Despite the downgrade, Moody’s stable outlook acknowledges U.S. strengths: a dynamic economy with $85,812 GDP per capita (2024), the dollar’s global reserve currency status, and robust monetary policy led by an independent Federal Reserve.