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Credit rating agency Moody’s has issued a cautionary statement regarding the fiscal future of the United States, citing concerns over President Donald Trump’s trade tariffs potentially hindering the nation’s ability to manage its escalating debt and rising interest rates.
In a report released on Tuesday, Moody’s expressed that America’s “fiscal resilience is heading towards a prolonged decline”, noting that the situation has worsened since the agency assigned a negative outlook to the country’s Aaa credit rating back in November 2023.
While recognizing the exceptional economic strength of the US and the significance of the dollar and Treasury market in the global financial system, Moody’s analysts also cautioned that the policies of the Trump administration, such as imposing extensive tariffs and proposing tax reductions, could have adverse effects on government revenues.
Moody’s stated, “The potential negative impact of sustained high tariffs, tax cuts without proper funding, and significant economic risks could diminish the ability of these key strengths to offset the widening fiscal deficits and declining debt affordability.”
The warning from Moody’s comes amidst intense discussions within Capitol Hill and the Trump administration on how to steer the US towards a more sustainable fiscal path. Concerns have been raised by analysts and investors regarding the rapid increase in debt and deficit, which could potentially impact the demand for US Treasuries, a cornerstone of the global financial system.
Notably, Pimco, a leading bond manager globally, expressed hesitancy in purchasing long-term Treasuries due to “sustainability questions” arising from the escalating fiscal challenges. The federal budget deficit reached $1.8 trillion for the fiscal year ending on September 30, marking an 8% increase from the previous year.
Moody’s decision to downgrade the US credit rating outlook to negative over two years ago was influenced by the surge in debt servicing costs and the deep-rooted political divisions in the country. The credit rating of the US holds significant importance as it directly impacts the nation’s debt affordability, with higher ratings typically resulting in lower borrowing costs.
Moody’s emphasized that the US “debt affordability is significantly weaker compared to other Aaa-rated and top-rated sovereigns”, with even the most optimistic economic scenarios pointing towards “growing risks that the deterioration in US fiscal strength might no longer be completely offset by its extraordinary economic resilience”.
The agency acknowledged the expected resilience and strength of the US economy but also highlighted that “the evolving government policies on trade, immigration, taxes, federal spending, and regulations could reshape parts of the US and global economy with substantial long-term implications”.
Despite President Trump’s advocacy for lower borrowing costs, the Federal Reserve opted to maintain interest rates steady last week within a range of 4.25% to 4.5%, with policymakers projecting approximately two quarter-point cuts throughout 2025. Moody’s anticipates a federal funds rate ranging between 3.75% and 4% by the end of the year.