The outlook on the US credit rating changed. to “negative” from “stable” on Friday by ratings firm Moody’s, which flagged the country’s worsening fiscal position and political polarization as long-term concerns for the U.S. economy.
The change stops short of a downgrade of the U.S. credit rating, which Moody’s maintained at the highest AAA level. But it is another black mark for the economy and underscores the threat posed by rising interest rates, a growing debt burden and a polarized Congress that has been unable to agree on ways to reduce the U.S. budget deficit.
In August, Fitch downgraded its long-term rating on the United States to AA+ from its top rating of AAA. That downgrade, two months after the United States narrowly avoided defaulting on its debt, was the second in U.S. history.
While Moody’s move is not a downgrade, it could present a political problem for President Biden, who has been attacked by Republicans for his handling of the economy, including the U.S. budget deficit. Republicans have been pushing for severe spending cuts to reduce the gap between what the United States spends and what it earns in tax revenue. Biden has proposed reducing future deficits by expanding the economy and raising taxes on high-income earners and corporations.
The federal government faces the prospect of a shutdown next week if Republicans and Democrats in Congress cannot agree on a spending plan.
Moody’s suggested Friday that it sees no immediate path for the United States to resolve its fiscal situation.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects US fiscal deficits to remain very large, significantly weakening debt affordability,” Moody’s said in a statement. “Continued political polarization within the US Congress increases the risk that successive administrations will be unable to reach consensus on a fiscal plan to curb declining debt affordability.”
Moody’s said it had declined to downgrade the rating due to the “formidable credit strengths” of the United States, highlighting the resilience of the economy, the strength of American economic institutions and the dollar’s role as a global reserve currency.
The announcement was made hours after Treasury Secretary Janet L. Yellen concluded meetings with her Chinese counterpart, Vice Premier He Lifeng, in San Francisco. After the meetings, she said she had explained the Biden administration’s deficit reduction efforts to officials from China, which is one of the United States’ largest creditors.
Treasury and White House officials said they disagreed with Moody’s change of outlook and blamed Republicans for creating dysfunction.
“Moody’s decision to change America’s outlook is yet another consequence of congressional Republican extremism and dysfunction,” White House press secretary Karine Jean-Pierre said in a statement.
Wally Adeyemo, deputy secretary of the Treasury, defended Biden’s management of the economy and said the administration was committed to fiscal sustainability.
“The U.S. economy remains strong and Treasury securities are the world’s leading safe and liquid asset,” Adeyemo said in a statement.
