Moody’s Downgrades U.S. Credit Rating, Citing Soaring Interest Rates, Leadership Dysfunction

In a concerning development for the world’s largest economy, Moody’s Ratings downgraded the United States’ sovereign credit rating from Aaa to Aa1 on Friday, erasing the nation’s last bastion of top-tier fiscal credibility.

The decision, announced as markets closed Friday, completes a trifecta of downgrades among major rating agencies, following Standard & Poor’s in 2011 and Fitch Ratings in 2023. With a $36 trillion federal debt casting a long shadow, Moody’s pointed to a perilous combination of soaring interest costs, ballooning entitlement programs, and a Congress paralyzed by partisan rancor.

“The United States retains exceptional credit strengths,” Moody’s acknowledged, citing “the size, resilience, and dynamism of its economy and the role of the U.S. dollar as global reserve currency.”

However, these advantages are no match for the fiscal storm brewing. The agency forecasts federal deficits surging to nearly 9% of GDP by 2035, up from 6.4% in 2024, fueled by “increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.” The debt-to-GDP ratio, already at 98% last year, is projected to hit 134% by 2035, a trajectory Moody’s deems unsustainable.

The downgrade landed like a thunderclap in a capital already reeling from political turmoil. Hours earlier, House Republicans watched their flagship tax and spending package, the “One Big Beautiful Bill Act,” implode in the Budget Committee. The 16-21 vote exposed fractures within the GOP and hardened Democratic opposition, offering a vivid snapshot of the gridlock Moody’s warned about.

The bill, a linchpin of President Donald Trump’s economic agenda, sought to cement the 2017 tax cuts, exempt tips, overtime, and certain auto loans from taxation, and raise the standard deduction to $32,000 for joint filers. It also dangled a temporary $500 hike to the child tax credit, bringing it to $2,500, while funneling $350 billion toward deportation efforts and Pentagon priorities.

But the package’s aggressive spending cuts, slashing over $1 trillion from health care and food assistance over a decade, ignited controversy. Proposed work requirements for Medicaid, demanding 80 hours of monthly work, and expanded SNAP restrictions for ages 55 to 64 drew fierce pushback.

Five GOP rebels, led by Reps. Chip Roy of Texas and Ralph Norman of South Carolina joined Democrats to sink the bill, demanding steeper Medicaid reductions, immediate welfare reforms, and the axing of Biden-era green energy tax credits. New York Republicans, meanwhile, clamored for a beefier State and Local Tax deduction, pitching $62,000 for single filers and $124,000 for joint filers against the bill’s $30,000 cap for joint filers earning up to $400,000.

Democrats pounced, branding the legislation a betrayal of the vulnerable. “This is one big, beautiful betrayal,” declared Rep. Pramila Jayapal, a progressive firebrand.

Rep. Morgan McGarvey of Kentucky warned of shuttered nursing homes, shuttered hospitals, and hungry children, citing Congressional Budget Office estimates that the bill would strip health insurance from 7.6 million people and cut 3 million monthly SNAP recipients. The defeat, played out in real-time on Capitol Hill, laid bare the dysfunction Moody’s flagged as a central driver of the downgrade.

Moody’s didn’t mince words about the fiscal fallout of current policies. Extending the 2017 Trump tax cuts, a top Republican goal, would pile an additional $4 trillion onto the primary deficit over the next decade, excluding interest, the agency calculated. This, coupled with reluctance from Republicans to raise taxes and Democrats’ resistance to spending cuts, has left Washington “unable to tackle America’s huge deficits,” as the Associated Press reported.

The downgrade threatens to jack up borrowing costs for the government, potentially rippling through to consumers grappling with mortgages, car loans, and credit card debt.

“This downgrade is part of a long trend of fiscal irresponsibility,” warned Spencer Hakimian, CEO of Tolou Capital Management, predicting higher costs for both public and private sectors.

Jay Hatfield, CEO of Infrastructure Capital Advisors, foresaw market jitters, especially as Trump’s tariff policies—already stirring fears of inflation and slowdown—compound vulnerabilities. Still, Hakimian noted that the U.S. dollar’s safe-haven status might cap spikes in Treasury yields.

Moody’s maintained a stable outlook, a nod to the U.S.’s economic heft and the dollar’s global dominance. But the warning signs are unmistakable.

“This downgrade adds to the evidence that the U.S. has too much debt,” said Darrell Duffie, a Stanford finance professor and former Moody’s board member. “Congress needs to either get more revenues or spend less.”

The announcement sparked a flurry of reactions, each tinged with political spin. Stephen Moore, a Heritage Foundation economist and former Trump advisor, decried the downgrade as “outrageous,” asking, “If U.S. government bonds aren’t a triple-A asset, then what is?”

White House communications director Steven Cheung took a swipe at Moody’s economist Mark Zandi, hinting at partisan motives. Senate Democratic Leader Chuck Schumer called it a “wake-up call” for Republicans to ditch their “deficit-busting tax giveaway,” adding dryly, “I’m not holding my breath.”

Moody’s verdict underlines a warning by economists that without a course correction, America’s debt burden risks becoming an anchor, dragging down an economy still buoyed by its global clout but increasingly tested by its own divisions.