Moody’s Downgrades US Credit Rating

On May 17, 2025, Moody’s Ratings downgraded the United States’ sovereign credit rating from the highest AAA level to Aa1. Alongside this, the agency lowered the counterparty risk ratings for several major US financial institutions, including JPMorgan Chase, Bank of America, State Street and Wells Fargo.

This announcement grabbed headlines worldwide, but what does it actually mean for markets and investors? Let’s break down why Moody’s made this move, how markets reacted and what it could mean for the US economy going forward.

Why Did Moody’s Downgrade the US Credit Rating?

The short answer: the US is struggling with its debt. Despite changes in administrations, federal debt levels have continued to rise unabated. Currently, the national debt stands at $36.22 trillion.

Moody’s highlighted that over the past decade, the US federal debt and associated interest payments have increased significantly—at a faster pace than peer countries with similar credit ratings.

Key projections from Moody’s include:

The federal deficit might balloon to almost 9% of GDP by 2035, up from 6.4% in 2024.
The total federal debt could hit 134% of GDP by 2035, compared to 98% in 2024.

The big drivers? Rising interest payments, higher spending on social programs and not enough government revenue to balance things out. For full details, see the official Moody’s press release.

Moody’s Still Sees Strength: Why the Stable Outlook?

Despite the downgrade, Moody’s assigned a stable outlook to the US credit rating. Here’s why:

The US economy is huge, with high incomes and a strong track record of innovation — all of which support solid long-term growth.
The US dollar is the world’s go-to reserve currency, which gives the government an edge in borrowing money without paying sky-high costs.
The US has solid monetary and economic policies that help keep things stable, even if the recent policy moves have been a bit unpredictable.

So, while short-term growth might slow down as the economy adjusts to higher tariffs, Moody’s doesn’t expect this to derail the US economy in the long run.

How Did Markets React?

Markets started off the week cautiously but didn’t show any signs of panic. A brief rebound on Wednesday gave hope, but a renewed sell-off on Wall Street overnight dragged Asian and European markets lower on Thursday. However, Friday saw a strong recovery, wiping out most of Thursday’s losses.
What really stood out was the move in US bond yields. The 10-year yield came close to 4.6% and the 30-year stayed above 5% — levels we haven’t seen since 2007.

Rising US bond yields usually spell trouble for emerging markets. Why? Because they pull global money toward safer US assets, push the dollar higher, make borrowing costlier for EMs — all of which tend to weigh down emerging market performance.

However, this reaction is expected to be short-lived. US Treasury Secretary Scott Bessent described Moody’s downgrade as “a lagging indicator,” noting that Moody’s has historically been slower to adjust the US rating compared to other major agencies. For context, S&P downgraded the US credit rating in 2011 and Fitch followed in 2023. Moody’s latest move aligns the rating with existing market realities.

What Should Investors Watch Now?

Currently, broader geopolitical and economic developments, particularly ongoing US-China trade negotiations, are more influential in shaping market sentiment than the downgrade itself. The relative stability in diplomatic relations has helped markets absorb this news with limited disruption.

Had the downgrade occurred amid heightened trade tensions or market uncertainty, the reaction could have been more pronounced.

Bottom Line: Challenges Ahead, But No Need to Panic

Moody’s downgrade shines a spotlight on the US’ growing debt and fiscal challenges. Nevertheless, the size and resilience of the US economy, combined with the dollar’s global prominence, provide significant buffers against potential shocks.

For now, investors should rather remain attentive to fiscal policy developments and global trade dynamics.

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