Moody’s Investors Service revised the outlook on the United States government’s credit rating from “stable” to “negative” on Friday. The rating agency expressed concerns about the persistently large fiscal deficits in the U.S., anticipating a significant impact on debt affordability.
Despite the change in outlook, Moody’s affirmed the long-term issuer and senior unsecured ratings at “Aaa.”
This adjustment prompted a dip in U.S. futures on Monday, with Dow Jones Industrial Average futures falling by 8 points. Similarly, futures tied to the S&P 500 and Nasdaq-100 both experienced a decrease of about 0.2%.
Moody’s cited the U.S.’s “very large” fiscal deficits and political gridlock in Washington as contributing factors to the negative outlook. Despite the downgrade, the agency maintained America’s credit rating at AAA, the highest level. This comes after Fitch lowered the U.S. long-term foreign currency issuer default rating to AA+ from AAA three months ago, citing anticipated fiscal deterioration, a growing debt burden, and political conflicts on fiscal and debt issues.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” Moody’s expressed concern that the U.S.’s fiscal deficits would persist, significantly weakening debt affordability.
Jay Hatfield, CEO at Infrastructure Capital Management, highlighted the impact on the attractiveness of U.S. debt for foreign investors, stating, “While there is ‘zero default risk of U.S. debt,’ the lower credit rating outlook remains relevant.”
“The U.S. has been downgraded because our budget process is completely broken. That’s really the crux of the issue — that there’s no real organized process to pass a budget. That does impact the psyche of global fund ambassadors,” Hatfield added.
Looking ahead, economic data, including October’s monthly federal budget and the Federal Reserve Bank of New York’s October consumer expectations survey, will be closely monitored. Fed Governor Lisa Cook is also scheduled to give remarks on Monday morning, preceding the monthly consumer price index data on Tuesday.
Despite the negative outlook, Moody’s expects the U.S. to “retain its exceptional economic strength,” and Deputy Secretary of the Treasury Wally Adeyemo disagreed with the shift to a negative outlook, stating, “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
Moody’s decision coincides with the looming threat of a government shutdown, as Congress faces challenges in reaching a consensus on a funding bill before the November 17 deadline. House Speaker Mike Johnson’s proposed funding plan has faced opposition, and political tensions in Washington have been cited as contributing factors to the ratings adjustment.
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