US faces threat of rating downgrade as Moody’s lowers outlook; 2 reasons why

The US was threatened with the loss of its last top credit rating on Friday, as Moody’s Investors Service signaled it was inclined to downgrade the nation because of wider budget deficits and political polarization. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said. Our expectation is that these higher rates and deficits around 6% of GDP for the next several years, and possibly higher, means that debt affordability will continue to pressure the US.” The reasons Moody’s is the only of the three main credit companies with a top rating on the US after Fitch Ratings downgraded the US government in August following the latest debt-ceiling battle. What matters “is less the aggregate rating and more the constant reminder to markets that fiscal risk is rising.” The Moody’s move also puts the US in an awkward situation as it prepares to host a massive gathering of Pacific Rim leaders, ministers and chief executives in San Francisco, where President Joe Biden and Chinese President Xi Jinping will meet on the sidelines in their first one-on-one discussion in a year. White House Press Secretary Karine Jean-Pierre said the outlook change was a “consequence of congressional Republican extremism and dysfunction.” Deputy Treasury Secretary Wally Adeyemo, meanwhile, pushed back against the outlook change, saying the economy “remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.” The impact Ten-year Treasury note futures dropped after the announcement, reaching fresh session lows.