Moody's Strips America's Last AAA Rating: What This Means for Global Markets and Your Wallet

The Fall of America's Last Perfect Credit Score: What Happened?

In a significant financial development that shocked markets, Moody's Ratings downgraded the United States' credit rating from Aaa to Aa1 on Friday, May 16, 2025. This historic move stripped America of its last perfect credit rating among the three major rating agencies, following similar downgrades by S&P Global in 2011 and Fitch Ratings in 2023.

Moody's decision, which came after market close on Friday, cited persistent fiscal challenges that have plagued the nation for over a decade. The agency specifically pointed to the alarming increase in government debt and interest payment ratios that are now significantly higher than those of similarly rated sovereign nations.

In its announcement, Moody's stated, Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. The agency expressed skepticism that any meaningful multi-year reductions in mandatory spending and deficits would result from current fiscal proposals under consideration, including the tax package being debated in Congress.

Understanding the Downgrade: Why Now?

The timing of Moody's decision is particularly noteworthy as it comes amid contentious budget negotiations in Congress. Just hours before the announcement, President Donald Trump's sweeping tax reform proposal failed to clear a key procedural hurdle in the House Budget Committee. Hardline Republicans, demanding deeper spending cuts, blocked the measure in what analysts describe as a rare political setback for the Republican president.

The downgrade reflects mounting concerns about America's fiscal trajectory. The federal budget deficit is approaching $2 trillion annually, exceeding 6% of gross domestic product. Moody's projects this deficit will expand to nearly 9% of GDP by 2035, primarily due to rising interest payments on debt, escalating entitlement expenditures like Medicare and Social Security, and relatively low revenue generation.

Currently, the total US debt has already eclipsed the size of the economy at approximately $36.2 trillion. The Congressional Budget Office warned in January that the US government is on track to exceed the record debt levels seen after World War II within four years, potentially reaching 107% of GDP by 2029. Moody's projections are even more concerning, suggesting federal debt might rise to approximately 134% of GDP by 2035.

Market Reactions and Immediate Impact

Financial markets reacted swiftly to the news on Friday evening. An exchange-traded fund tracking the S&P 500 Index fell 1% in after-hours trading, while the Invesco QQQ Trust Series 1 ETF declined 1.3%. Treasury futures closed at session lows, and the 10-year Treasury yield climbed as high as 4.49% amid low trading volumes.

As markets reopen in Asia on Monday, May 19, investors are bracing for potential volatility. The downgrade poses a risk of intensifying Wall Street's apprehensions about the US sovereign bond market, especially as lawmakers discuss additional unfunded tax cuts and the economy appears poised for a slowdown.

Many analysts, however, suggest that the market impact may be contained. Michael Lerner, chief market strategist at Truist, communicated via email, We don't think this is a game changer but an excuse for investors to take a little bit of profits. This sentiment echoes what happened after previous downgrades by S&P and Fitch, which initially caused market turbulence but ultimately had limited long-term effects on US borrowing costs.

Historical Context: Not the First Downgrade

This isn't the first time the United States has faced a credit rating downgrade. S&P Global Ratings was the first major agency to strip the US of its AAA rating back in August 2011, during a contentious standoff over the debt ceiling. That downgrade triggered political upheaval and coincided with a stock market downturn linked to fiscal uncertainty and a worsening debt crisis in the eurozone.

Interestingly, Treasury securities rallied following the S&P downgrade in 2011, with yields actually falling due to broader economic growth concerns. This counterintuitive reaction highlights the complex relationship between credit ratings and market behavior, particularly when it comes to the world's largest economy and issuer of the global reserve currency.

Fitch Ratings followed suit in August 2023, lowering the US sovereign rating by one notch, citing anticipated fiscal deterioration and ongoing contentious debt ceiling negotiations. Now, with Moody's joining the other agencies, the United States no longer holds a perfect credit rating from any of the three major rating agencies for the first time since Moody's began rating US debt in 1917.

Political Fallout and Finger-Pointing

The downgrade has predictably sparked political recriminations from both sides of the aisle. The White House responded by stating it was dedicated to rectifying Biden's situation, while also criticizing Moody's credibility. White House spokesperson Kush Desai remarked, If Moody's had any credibility, they would have spoken out as the fiscal crisis of the past four years unfolded.

Senate Democratic Leader Chuck Schumer stated that Moody's downgrade of the United States should serve as a wake-up call to Trump and Republicans to halt their reckless pursuit of deficit-increasing tax cuts. However, he added that he was not holding his breath for change.

Trump allies have also criticized the decision. Stephen Moore, who served as a senior economic advisor to Trump and is now an economist at the Heritage Foundation, labeled the downgrade as outrageous, questioning the notion of a US government-backed bond being anything but a top-tier asset. Meanwhile, White House communications director Steven Cheung took to social media to criticize Moody's chief economist Mark Zandi, labeling him as a political adversary of Trump.

What This Means for Consumers and Investors

For everyday Americans, a credit rating downgrade could potentially lead to higher borrowing costs across the economy. When the government pays more to borrow, those increased costs can cascade through the financial system, affecting interest rates on mortgages, auto loans, credit cards, and corporate debt.

However, many financial experts suggest the practical impact may be limited in the short term. The US dollar's status as the world's reserve currency and the depth and liquidity of US Treasury markets mean that demand for US debt remains robust despite concerns about fiscal sustainability.

For investors, the downgrade serves as a reminder of the long-term fiscal challenges facing the United States. While immediate market reactions may be contained, the underlying issues highlighted by Moody's-rising debt, persistent deficits, and political gridlock-remain unresolved structural problems that could eventually lead to more significant economic consequences if left unaddressed.

Long-Term Implications and Global Perspective

Beyond the immediate market reactions, Moody's downgrade raises important questions about America's fiscal future and its standing in the global financial system. While the US dollar remains the world's reserve currency and US Treasury securities continue to be viewed as among the safest investments globally, the unanimous downgrade from all three major rating agencies signals eroding confidence in America's fiscal management.

Maxim Bokh, deputy chief investment officer at Franklin Templeton Investment Solutions, remarked, A Treasury downgrade is not surprising given the persistent unfunded fiscal largesse that is only expected to escalate. Debt servicing expenses will continue to rise as major investors, both sovereign and institutional, gradually exchange Treasuries for other safe-haven assets.

This gradual shift could potentially lead to what Bokh describes as a perilous bear steepener spiral for US yields, exert further downward pressure on the dollar, and diminish the appeal of US equities. While such dramatic consequences aren't immediate, the downgrade represents another step in what some economists view as a slow erosion of America's financial dominance.

Despite these concerns, Moody's did acknowledge that the US maintains exceptional credit strengths, including the scale, resilience, and dynamism of its economy, as well as the ongoing status of the US dollar as the global reserve currency. The agency also revised its outlook on the US from negative to stable, suggesting it doesn't anticipate further downgrades in the near term.