Moody’s Downgrades U.S. Credit Rating Amid $36 Trillion Debt Spiral

Moody’s Downgrades U.S. Credit Rating Amid $36 Trillion Debt Spiral

Agency Cites Soaring Deficits, Lack of Fiscal Discipline as Warning Signs

Moody’s Investors Service has downgraded the credit rating of the United States government from Aaa to Aa1, citing the relentless rise in national debt and the absence of any credible plan to curb spending or reduce deficits. The revision marks a significant, albeit modest, shift in how one of the world’s largest economies is viewed by the credit markets.

This one-notch drop on Moody’s 21-point scale comes as U.S. federal debt surpassed $36 trillion in January 2025, a record that’s rattling markets and testing long-term investor confidence. The agency emphasized that while the short- to medium-term outlook is negative, the long-term view remains stable, largely due to the strength of the U.S. economy and the dollar’s position as the world’s reserve currency.

Moody’s: No Real Progress on Spending Cuts

In its May 16 statement, Moody’s made clear that the downgrade reflects deepening fiscal indiscipline in Washington. Legislators have repeatedly failed to implement meaningful spending cuts, particularly in mandatory entitlement programs, and current fiscal proposals offer little hope of a turnaround.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from the current fiscal proposals under consideration,” the agency noted.

Over the next decade, Moody’s projects larger deficits, driven by rising entitlement costs and stagnant government revenue.

Investor Sentiment Splinters on Downgrade

The downgrade has triggered mixed reactions across financial markets. Some investors see the move as long overdue, while others question the credibility of Moody’s assessment.

Gabor Gurbacs, CEO of crypto rewards firm Pointsville, criticized the agency for its track record, recalling its role during the 2008 financial crisis:

“This is the same Moody’s that gave Aaa ratings to subprime mortgage-backed securities,” he posted on X.

Conversely, macroeconomic strategist Jim Bianco dismissed the downgrade as a “nothing burger,” suggesting the move has minimal impact on the real perception of U.S. creditworthiness.

Bond Yields Signal Growing Concern

Despite the divided opinions, market indicators tell a cautionary tale. Interest rates on the 30-year U.S. Treasury Bond surged to nearly 5% in May 2025, a sign that investors are demanding higher returns to hold long-dated U.S. debt.

This spike in yields is not without consequence. As the government pays more to service its debt, the interest burden itself accelerates the debt’s growth—creating a dangerous feedback loop that economists warn could spiral further without intervention.

A Vicious Cycle with No Clear End in Sight

With federal debt growing faster than GDP, and interest payments ballooning, the U.S. faces mounting challenges. Unless policymakers introduce meaningful fiscal reforms, the government will be forced to offer ever-higher yields to attract buyers, pushing debt costs even higher.

While Moody’s still considers the U.S. a strong long-term borrower, this downgrade acts as a sobering reminder that even the world’s largest economy is not immune to the consequences of fiscal neglect.