Moody's downgrades US government ratings due to rising federal debt and interest payments

The downgrade, which marks a one-notch fall on Moody's 21-point rating scale, comes amid concerns over rising federal debt and interest payments, which have increased significantly over the past decade.

The rating agency said the move reflects the continued failure of successive US administrations and Congress to agree on measures that could reverse the trend of large and persistent fiscal deficits.

Moody's said "Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration".

It noted that the US federal government has been spending more, while revenues have declined due to tax cuts. This combination has led to growing deficits and debt levels.

Moody's said it expects the US to continue running large fiscal deficits over the next decade, particularly as entitlement spending increases and revenue growth remains flat.

If the 2017 Tax Cuts and Jobs Act is extended, as Moody's assumes--it could add an estimated USD 4 trillion to the federal primary deficit (excluding interest payments) over the next ten years.

By 2035, mandatory spending, including interest, is projected to make up around 78 per cent of total federal spending, up from 73 per cent in 2024.

However, despite the downgrade, Moody's assigned a stable outlook, citing balanced risks at the Aa1 level.

It acknowledged several credit strengths that support the US economy, such as its large size, resilience, high average incomes, and strong track record of innovation.

The agency also pointed to the US dollar's role as the world's dominant reserve currency, which provides the government with strong financing capabilities despite its high deficits.

Moody's believes the US will maintain its institutional strengths, including the constitutional separation of powers and an effective, independent monetary policy led by the Federal Reserve.

Going forward, Moody's said that a return to fiscal discipline, through increased revenues or reduced spending, could lead to an upgrade in the rating.

On the other hand, a faster-than-expected deterioration in debt metrics or a sudden loss of confidence in the US dollar could trigger another downgrade.

However, the agency considers such a scenario unlikely, as there is currently no credible alternative to the US dollar as a global reserve currency.