A leading credit rating agency has sounded the alarm over the United States' fiscal trajectory, emphasizing concerns about the sustainability of current economic policies. Moody’s Investors Service recently highlighted that President Donald Trump's trade tariffs and tax cut plans could undermine America's capacity to manage rising debt levels and increasing interest rates. While acknowledging the unparalleled resilience of the U.S. economy and its pivotal role in global finance, Moody’s warned that ongoing fiscal challenges may persist even under favorable conditions. The announcement comes amid intense discussions within Washington about how to address escalating deficits and debt.
On Tuesday, Moody’s released a statement pointing out that the fiscal strength of the United States is expected to experience a prolonged decline over multiple years. Since November 2023, when the agency assigned a negative outlook to America’s Aaa credit rating, the situation has further deteriorated. Although the U.S. dollar and Treasury market remain cornerstones of the international financial system, Moody’s analysts expressed apprehension regarding the second Trump administration’s policies. These include widespread tariffs and proposals for tax reductions, which might negatively affect government revenues.
The potential adverse effects of sustained high tariffs, unfunded tax cuts, and significant risks to the economy have reduced the likelihood that the nation’s strengths will counterbalance expanding fiscal deficits and declining debt affordability. Even in highly optimistic economic and financial scenarios, fiscal weakening is likely to continue, according to Moody’s assessment. This warning coincides with heated debates on Capitol Hill and within the Trump administration concerning strategies to achieve a more sustainable fiscal course.
Investors and analysts have raised concerns that the rapid increase in U.S. debt and deficit might eventually reduce demand for Treasuries, which are fundamental to the global financial system. Late last year, Pimco, one of the largest bond management firms globally, indicated hesitation in purchasing long-term Treasuries due to sustainability questions. For the fiscal year ending September 30, the federal budget deficit reached $1.8 trillion, marking an 8 percent rise from the previous year.
When Moody’s adjusted its outlook on the U.S. credit rating to negative over two years ago, it cited significantly higher debt servicing costs and entrenched political polarization as key factors. The U.S. credit rating is closely monitored because it significantly influences the country’s debt affordability—higher ratings and positive outlooks typically result in lower borrowing costs. Despite these warnings, Moody’s anticipates that the world’s largest economy will maintain strength and resilience. However, evolving U.S. government policies on trade, immigration, taxes, federal spending, and regulations could reshape parts of both the domestic and global economies with substantial long-term implications.
While President Trump frequently advocates for lower borrowing costs, the Federal Reserve maintained interest rates last week within a range of 4.25 percent to 4.5 percent. Policymakers predict approximately two quarter-point cuts throughout 2025. Moody’s expects the federal funds rate to stabilize between 3.75 percent and 4 percent by year-end. This complex interplay of fiscal policy, economic resilience, and global ramifications underscores the critical importance of addressing the U.S.'s fiscal future responsibly and effectively.