Historic U.S. Credit Downgrade Raises Alarm on Rising Interest and Debt

WASHINGTON D.C. — Moody’s Investors Service downgraded the United States’ sovereign credit rating from AAA to AA1 on May 16, 2025, citing structural fiscal challenges and a lack of effective policymaking to address ballooning deficits and rising interest costs. This move marks a historic moment as the U.S. no longer holds a top-tier credit rating from any of the three major rating agencies (Moody’s, Standard & Poor’s, and Fitch Ratings) for the first time in over a century.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said in its formal announcement, expressing concern over the government’s long-term fiscal outlook and political gridlock.

The downgrade follows similar decisions by S&P in 2011 and Fitch in 2023. Together, these actions reflect growing skepticism among global financial observers about the U.S. government's ability to sustainably manage its finances. Moody’s cited recent fiscal proposals under consideration, such as large-scale tax cuts and expansive spending bills, as contributing to the downgrade. These initiatives, the agency said, demonstrate a continued trajectory of budgetary deterioration without meaningful counterbalancing reforms.

Federal debt has climbed to $36.22 trillion in 2025, up from approximately $28 trillion just six years ago. In fiscal year 2024 alone, the U.S. Treasury paid $1.1 trillion in interest on the national debt, a record-high figure that now rivals what the government spends annually on defense. Moody’s warned that with higher interest rates now baked into the bond markets, those interest payments are likely to rise further.

The credit downgrade carries significant financial consequences. The yield on 30-year U.S. Treasury bonds jumped above 5 percent shortly after the announcement, reflecting investor anxiety over fiscal governance. Higher yields mean increased borrowing costs for the government and, by extension, higher interest rates for consumers and businesses on products such as mortgages, credit cards, and auto loans.

Republican and Democratic lawmakers quickly exchanged blame following the announcement. GOP leaders faulted the Biden administration’s spending policies, highlighting multi-trillion-dollar legislative packages passed since 2021. Democrats pointed to the proposed $3.8 trillion extension of the 2017 Tax Cuts and Jobs Act championed by House Republicans, which the Congressional Budget Office projects could add more than $2.5 trillion to the deficit over the next decade.

Moody’s did acknowledge strengths that support a “stable” outlook for the downgraded rating. These include the resilience of the U.S. economy, the dollar’s role as the global reserve currency, and the operational independence and credibility of the Federal Reserve. The agency underscored that these elements provide the country with flexibility, but only if policymakers begin to demonstrate a commitment to sustainable budgeting.

“The downgrade of our AAA rating serves as an urgent escalation of the need to prioritize fiscal responsibility,” said the Bipartisan Policy Center in a statement, warning that political polarization and avoidance of difficult fiscal decisions are placing the nation’s economic future at risk.

The White House has not issued a comprehensive fiscal plan addressing long-term deficit reduction in response to the downgrade. Meanwhile, legislation with high fiscal impact continues to be considered without corresponding revenue measures or spending offsets, according to analysis by the Peter G. Peterson Foundation.

Moody’s noted that without a bipartisan approach to reforming both mandatory spending programs and the federal tax code, the fiscal position of the U.S. will likely continue to deteriorate both in absolute terms and in comparison with other highly-rated sovereign nations.

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