• Moody's downgrades US credit rating from Aaa to Aa1, removing its last triple-A rating.
• The agency cites rising government debt and unaddressed fiscal deficits as primary reasons.
• Federal debt is projected to rise to 134% of GDP by 2035.
• The downgrade coincides with the failure of President Trump's key tax and spending legislation in Congress.
• Despite the downgrade, Moody's maintains a stable outlook for the US economy citing its resilience and the dollar's global role.

On May 16, Moody's Investors Service downgraded the United States' long-held Aaa credit rating to Aa1, marking the removal of its last top-tier status among major credit rating agencies. The agency attributed this decision to rising levels of government debt and persistent fiscal deficits, which it described as "significantly higher than similarly rated sovereigns," echoing similar decisions by Fitch in 2023 and S&P in 2011. Furthermore, Moody’s highlighted the "increase over more than a decade in government debt and interest payment ratios," which prompted the downgrade, according to Reuters and South China Morning Post.

Moody's warned that federal deficits are expected to widen to nearly 9% of the economic output by 2035, compared to 6.4% in 2023, primarily due to increasing interest payments on debt and rising entitlement spending against a backdrop of stagnant revenue growth. The ratings agency projects that US federal debt will rise to 134% of GDP by 2035 from 98% last year. This deteriorating fiscal performance relative to the US's own past and other highly-rated sovereigns underpins the downgrade, states CBS News and BBC.

The timing of the downgrade coincided with the failure of President Donald Trump's proposed multi-trillion dollar tax and spending bill to pass a critical vote in Congress, highlighting the political turmoil and challenges surrounding fiscal management. "Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody’s remarked. This reflects a broader concern of governance that has led to repeated financial missteps, according to New York Times and Channel News Asia.

Despite these concerns, Moody's outlook for the U.S. economy has been revised from "negative" to "stable," citing the nation’s enduring economic strengths including its size and the prominence of the US dollar as the global reserve currency. The agency noted that these institutional strengths indicate resilience, even as challenges persist due to rising debt levels. Thus, while the current credit downgrade presents substantial challenges, some analysts suggest that demand for US Treasury securities will likely remain robust due to the underlying strengths of the US economy, as noted by Business Insider and Bangkok Post.