The US credit rating is a measure of the country’s ability to repay its debt and the risk of defaulting on its obligations. The higher the rating, the lower the interest rate that the US government has to pay to borrow money from investors. A lower rating, on the other hand, implies a higher risk of default and a higher interest rate.
The consumer price index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of goods and services. The CPI reflects the cost of living and the purchasing power of consumers. A higher CPI means that prices are rising faster than incomes, which erodes the real value of money and reduces consumer spending.
Both the US credit rating and the CPI rates are important indicators of the health and stability of the US economy. They affect various aspects of economic activity, such as business confidence, investment, trade, growth, and employment. The US credit rating and the CPI rates of November 2023 have changed compared to previous months and years, and what implications they have for the US economy in 2023 and beyond.
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The US Credit Rating Downgrade
In October 2023, Moody’s Investors Service downgraded the US credit rating from Aaa to Aa1, citing the rising debt burden, the political gridlock over fiscal policy, and the uncertainty over the future of social security and health care programs. This was the first time that Moody’s lowered the US rating since 2011, when it placed it on negative outlook following the debt ceiling crisis.
Moody’s said that the US debt-to-GDP ratio, which measures the size of the public debt relative to the size of the economy, was projected to rise from 107% in 2022 to 112% in 2023, and to continue increasing thereafter. Moody’s also said that the US fiscal policy was “increasingly incoherent and unstable”, as evidenced by the repeated government shutdowns, the lack of a long-term budget plan, and the growing reliance on temporary spending measures.
Moody’s warned that further downgrades were possible if the US failed to address its fiscal challenges and restore its credibility. It said that a downgrade to Aa2 could occur if there was a significant deterioration in economic growth prospects, a material increases in interest rates, or a failure to raise the debt ceiling in a timely manner.
The downgrade by Moody’s followed similar actions by other rating agencies in recent years. In 2011, Standard & Poor’s (S&P) cut the US rating from AAA to AA+, citing similar concerns over debt and political dysfunction. In 2016, Fitch Ratings affirmed its AAA rating for the US, but revised its outlook from stable to negative, citing “deteriorating public finances” and “reduced policy flexibility”. In 2019, S&P also revised its outlook for the US from stable to negative, citing “growing discord” among policymakers and “rising debt levels”.
Moody’s downgrades US credit outlook from stable to negative.
Moody’s cited several factors for its decision, including the worsening fiscal situation, the lack of a credible plan to reduce the debt burden, the political gridlock in Washington, and the uncertainty caused by the ongoing pandemic and its variants. The agency warned that the US’s debt-to-GDP ratio, which is projected to rise above 130% by 2025, is unsustainable and poses a risk to its creditworthiness.
The negative outlook is not a downgrade yet, but it signals that Moody’s is losing confidence in the US’s ability to manage its finances and address its long-term challenges. A downgrade would mean that Moody’s no longer considers the US as a safe and reliable borrower and could trigger a sell-off of US Treasury bonds, higher interest rates, and a weaker dollar. It could also affect the ratings of other entities that are linked to the US government, such as states, municipalities, and corporations.
The US is one of only 11 countries that have a AAA rating from Moody’s, which is the highest possible rating and indicates a very low probability of default. The US has maintained this rating since 1917 and has never been downgraded by any major rating agency. However, in 2011, Standard & Poor’s cut its rating on the US from AAA to AA+, citing similar concerns as Moody’s. Fitch Ratings still assigns a AAA rating to the US, but also has a negative outlook.
Moody’s said that it could revise its outlook back to stable if the US shows progress in reducing its debt ratio, implementing fiscal reforms, and restoring political stability. However, it also said that it could downgrade the rating if the US fails to meet its debt obligations, faces a severe economic shock, or experiences a significant deterioration in its institutional strength.