Moody's issues 'negative' outlook for US credit amidst high interest rates

In a significant development on Friday, 10 November 2023, Moody's Investors Service, a leading credit rating agency, revised its outlook on the United States government's debt from "stable" to "negative." This decision was primarily attributed to the escalating costs of rising interest rates and the intensifying political polarization within Congress.

While Moody's retained the top triple-A credit rating for U.S. government debt, it was the last of the three major credit rating agencies to maintain this status. Fitch Ratings had downgraded its rating to AA+ from AAA in August, while Standard & Poor's had previously downgraded the US in 2011. Despite the current maintenance of the triple-A rating, the lowered outlook raises concerns that Moody's could potentially strip the United States of its top credit rating in the future.

The implications of a lower credit rating on US debt are significant, potentially leading to increased interest rates on Treasury bills and notes, ultimately impacting taxpayers. The yield on the 10-year Treasury has experienced a sharp rise since July, increasing from approximately 3.9 percent to 4.6 percent as of Friday, 10 November, 2023.

Moody's, in a statement, expressed concerns about the lack of effective fiscal policy measures to address the large fiscal deficits in the context of higher interest rates. The agency emphasized that without substantial efforts to reduce government spending or increase revenues, the fiscal deficits in the United States are likely to remain very large, significantly weakening debt affordability.

The Biden administration responded to Moody's decision with criticism. Deputy Treasury Secretary Wally Adeyemo contested the transition to a negative outlook, asserting that although Moody's statement upholds the United States' AAA rating, they express disagreement with the shift to a negative outlook. According to Adeyemo, the American economy retains its strength, and Treasury securities stand as the world's preeminent safe and liquid asset.

Amidst these economic concerns, congressional lawmakers left Washington for the weekend without a plan to address the potential government shutdown looming by November 17. Moody's cited congressional dysfunction as a significant factor contributing to the lowered outlook on US debt. The agency pointed to recent events, including renewed debt limit brinkmanship, the historic ouster of a House Speaker, prolonged congressional inability to select a new House Speaker, and increased threats of another partial government shutdown, as illustrative of the depth of political divisions in the United States.