Why Moody’s Downgrade of the US Credit Rating Matters: Understanding the Impact of Rising Debt

Moody’s just downgraded the U.S. government’s credit rating from Aaa to Aa1. They say the growing national debt is the main reason for this change. In their announcement on May 16, they noted that U.S. lawmakers have struggled to control annual deficits and spending, which has only added to the national debt.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from the current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat.”

This downgrade is just one level down on Moody’s 21-notch rating scale. Still, they maintain a positive long-term outlook for the U.S. economy, highlighting its strength and the dollar’s role as the global reserve currency.

Despite the negative near-term outlook, many investors are reacting differently to this news. Some aren’t too worried. Gabor Gurbacs, a crypto expert, pointed out how Moody’s past ratings, like those for mortgage-backed securities before the 2008 crisis, were unreliable. He questioned if this downgrade truly reflected the current economic situation.

On the other hand, investor Jim Bianco downplayed the downgrade, calling it a “nothing burger.” He believes it doesn’t mean U.S. government credit is actually weakening.

As of January 2025, U.S. government debt has soared past $36 trillion. The more the debt grows, the less confidence investors have in U.S. securities. This could lead to rising bond yields, which would further inflate the debt as servicing costs increase.

It’s worth noting that this situation echoes past financial crises, where rising debt prompted serious financial repercussions. For instance, in the early 2000s, the U.S. faced similar warnings but didn’t address the underlying issues until it was too late.

In recent years, rising yields on government bonds, which hit nearly 5% in May 2025, indicate that investors are getting more cautious. As they’re offered higher rates, the government might struggle to maintain investor interest without increasing yields further.

Ultimately, the economy’s future rests on whether lawmakers can find a way to tackle these long-term financial challenges. The balance between government spending and revenue generation will be crucial in shaping the path ahead.

For more on the U.S. national debt, you can refer to the US National Debt Clock.

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