Moody's downgrades the US credit rating, infuriating Washington

 Moody's downgrades the US credit rating, infuriating Washington

Investors' concerns about federal expenditure and political division have grown, which has led to a selloff that has driven US government bond prices to their lowest points in sixteen years.

"Continued political polarization" in Congress increases the likelihood that legislators won't be able to agree on a budget plan to reduce the decrease in debt affordability, according to a statement from the ratings agency.

Moody's downgraded its outlook for the US credit rating from "stable" to "negative" on November 10th, citing significant budget deficits and a decrease in debt affordability. The administration of President Joe Biden immediately criticized the decision.

The action followed months of political bluster over the US debt limit, which culminated in a reduction of the sovereign's rating by another rating agency, Fitch, this year.

Investors' concerns about federal expenditure and political division have grown, which has led to a selloff that has driven US government bond prices to their lowest points in sixteen years.

Christopher Hodge, senior economist for the United States at Natixis, stated, "It is hard to disagree with the reasons, with no reasonable expectation for the consolidation of finances any time soon." "Problems will remain large (even if not expanding) and when interest costs take up a larger share of the budget, the debt burden will keep continuing to grow."

"Continued political polarization" in Congress increases the likelihood that legislators won't be able to agree on a budgetary plan to reduce the decrease in debt affordability, according to a statement from the ratings agency.

The US House of Representatives, which is controlled by Republicans, is expected to unveil a temporary budget bill on Saturday that would keep federal agencies operating when the current funding ends on Friday, perhaps preventing a partial government shutdown.

Out of the three major rating agencies, Moody's is the last to keep the US government rated at the top. at August, Fitch upgraded from triple-A to AA+, joining S&P, which has been at this rating since 2011.

Despite modifying its outlook and suggesting a potential downgrading in the medium run, Moody's maintained its 'Aaa' long-term issuer and senior unsecured ratings, citing the credit and economic strengths of the United States.

Speaking first on Moody's release, White House spokeswoman Karine Jean-Pierre described the move as "yet another consequence of congressional Conservative extremism and dysfunction."

"We disagree with the change to a negative outlook, even if Moody's retains the United States' AAA rating in its statement. Treasury securities are the most secure and liquid asset globally, and the US economy is still robust," Deputy Treasury Secretary Wally Adeyemo said in an press release.

Adeyemo claimed that the Biden administration had proven its commitment to fiscal sustainability by proposing to cut the deficit by nearly $2.5 trillion over the next ten years and by including over $1 trillion in deficit reduction measures in a June agreement with Congress on raising the U.S. debt limit.

Treasury rates have increased dramatically this year due to worries over US-focused fiscal policy and predictions that the Federal Reserve would maintain restrictive monetary policy.

According to Moody's, "the sharp increase in Treasury yields has gone up pre-existing pressure on US debt affordability."

Some of the gains made in previous weeks have been erased by yields.

A downgrade by Moody's may intensify budgetary worries, but investors have expressed skepticism that it would materially affect the US bond market, which is seen as a safe haven due to its depth and liquidity.

But according to Quincy Krosby, chief global strategist at LPL Financial, "it is an indicator that the clock is ticking increasingly the markets are moving closer and closer to understanding that we could go into a further round of drama that could ultimately ultimately result in the government shutting down."

Additionally, Biden's popularity has declined significantly in the polls as he runs for reelection in 2024, which coincides with Moody's conclusion. He was behind the front-runner Republican, former President Donald Trump, in five of the six battleground states (Nevada, Georgia, Arizona, Michigan, and Pennsylvania), according to a New York Times/Siena survey issued on Sunday. In Wisconsin, Biden led Trump in the polls. Who wins the presidential race will be influenced by the results in the six states.

In order to prevent a partial government shutdown, the Moody's action will also put further pressure on House Republicans to bring financing legislation forward.

Speaker of the US House Mike Johnson has been debating several interim proposals for days with members of his narrow Republican majority (221–212). Before the current financing expires on November 17, the House as well as the Democratic-led Senate need to compromise on a vehicle that Biden can sign into law.

Hardline Republican Representative Andy Harris said on X, previously known as Twitter, "We cannot, out of good conscience, continue writing blank checks to our the federal government's realizing that our children and grandchildren will be accountable for the largest debt in American history."

Republicans in the House have been squabbling among themselves, which has flirted with government shutdowns, but both parties have contributed to financial imbalances.

Wide-ranging spending plans have been supported by Biden's Democrats, but early in Donald Trump's administration, Republicans forced through significant tax cuts that further increased the debt. The growing expenses of the Social Security and Medicare programs, which account for a considerable portion of government expenditure, have not received any real attention from either party.