Will the U.S. retain its AAA rating in 2025?

The potential downgrade of the United States' credit rating by Moody’s Investors Service, the last of the major rating agencies to maintain a AAA rating, could have far-reaching implications for financial markets and global confidence. In November 2023, Moody’s shifted its outlook for the U.S. to negative, signaling concerns over fiscal health and political polarization. This follows similar downgrades by S&P in 2011 and Fitch in 2023, both of which cited deteriorating governance and rising debt levels as key factors. A downgrade from Moody’s would strip the U.S. of its last top-tier credit rating, raising questions about the long-term sustainability of its fiscal path.

One of the primary drivers behind Moody’s concerns is debt affordability. Rising interest rates have significantly increased the cost of servicing U.S. debt, which now exceeds $1 trillion annually. The Congressional Budget Office (CBO) projects annual deficits around $1.8 trillion through the end of the decade, with the potential for further increases if tax cuts from 2017 are extended under the incoming Trump administration. Without concrete policies to address these structural issues, the U.S. fiscal outlook is expected to worsen, further eroding confidence in its ability to manage its obligations.

Political polarization also plays a significant role in Moody’s negative outlook. The inability of Congress to effectively address fiscal challenges, highlighted by repeated standoffs over the debt ceiling and government funding, undermines confidence in the stability and predictability of American policymaking. Moody’s cited these governance issues, alongside the recent struggles to elect a Speaker of the House, as evidence of a deeply divided political environment that complicates efforts to enact necessary reforms.

The implications of a downgrade would be profound for financial markets. A lower credit rating could increase borrowing costs for the U.S. government, potentially adding billions in interest expenses. This would likely have a cascading effect on corporate borrowing, mortgage rates, and other financial instruments tied to Treasury yields. Additionally, investor confidence in U.S. Treasuries as the global standard of risk-free assets could diminish, prompting a reevaluation of portfolio strategies worldwide.

Global markets might also experience heightened volatility as a result of the downgrade. The ripple effects could impact currencies, with the U.S. dollar potentially losing some of its safe-haven appeal. Sovereign bond markets in other developed economies might see increased demand as investors seek alternatives to U.S. debt. Furthermore, the downgrade could undermine the U.S.’s influence in global financial systems, where its debt has long been a cornerstone of stability.

Despite these risks, some analysts argue that the immediate market impact may be limited. Treasuries remain deeply embedded in global financial systems, and a Moody’s downgrade would not change the fundamental necessity of U.S. debt in global liquidity and reserve management. However, a downgrade would still be a symbolic blow, signaling deeper structural concerns and raising questions about the long-term trajectory of U.S. fiscal policy.

In conclusion, a potential Moody’s downgrade would reflect the culmination of years of fiscal and political challenges that remain unaddressed. While markets may continue to rely on U.S. Treasuries in the short term, the warning signs are clear: the U.S. must take substantive steps to stabilize its fiscal outlook and restore confidence in its governance. Failure to do so risks long-term damage to its creditworthiness, global standing, and economic stability.