Moody’s has stripped the United States of its last remaining AAA credit rating, downgrading it to Aa1, due to mounting debt and rising interest payment ratios.
This marks the end of an era, as Moody's maintained the U.S.’s pristine ratings since 1917.
The downgrade follows similar moves by Fitch Ratings in 2023 and S&P Global Ratings in 2011, reinforcing concerns about Washington’s inability to rein in ballooning deficits.
While Moody’s acknowledges the U.S.’s economic resilience and the dollar’s role as the global reserve currency, it warns that federal debt is projected to reach 134% of GDP by 2035, up from 98% last year.
The White House swiftly responded, dismissing Moody’s credibility and blaming previous fiscal mismanagement for the downgrade.
Meanwhile, Trump’s landmark spending bill — dubbed the “Big Beautiful Bill” — suffered a setback in Congress, failing to pass the House Budget Committee as some Republicans opposed it.
The bill, which could add trillions to the national debt, has heightened investor concerns about Washington’s fiscal trajectory.
Moody’s decision underscores the growing pressure on U.S. policymakers to stabilise debt levels and restore confidence in the country’s financial standing.
For global investors, the downgrade signals higher borrowing costs for the U.S. government, potentially leading to higher Treasury yields and tighter financial conditions.
While the immediate market reaction has been muted, analysts warn that prolonged fiscal instability could erode investor confidence in U.S. assets.
The downgrade also raises questions about the Federal Reserve’s ability to manage monetary policy effectively amid rising debt burdens.
Investors will closely watch how Washington navigates fiscal policy in the coming months.
Australian investors should watch out for ripple effects
The downgrade could trigger volatility on global markets, impacting Australian equities and bond yields. If U.S. Treasury yields rise, Australian government bonds may follow suit, leading to higher borrowing costs domestically.
Australian investors should continue to monitor U.S. policy developments closely, especially debt ceiling negotiations and fiscal stimulus measures. As uncertainty looms, diversification and risk management will be key strategies for navigating potential market turbulence.
Additionally, a weaker U.S. credit profile could weigh on the Australian dollar, as investors reassess risk exposure to U.S.-linked assets. Given Australia’s deep economic ties to the U.S., local markets may experience heightened sensitivity to shifts in American fiscal policy.
Despite the downgrade, the U.S. remains a dominant force in global finance, and its debt remains highly sought after. However, the move served as a stark warning that unchecked fiscal expansion could have long-term consequences.
