Moody Shifts US Credit Outlook: In a momentous turn of events, Moody’s has ushered in a new chapter in the narrative of the U.S. credit rating, marking a departure from the “stable” outlook to a more foreboding “negative” stance. This strategic move by the credit agency mirrors a similar recalibration by Fitch, underscoring mounting concerns regarding expanding fiscal deficits and a perceptible erosion in debt affordability.
The intricate interplay between federal spending dynamics and the ever-intensifying political polarization has become a growing source of apprehension for investors. This, in turn, has contributed to a discernible sell-off, pushing U.S. government bond prices to their lowest levels in a staggering 16 years. The rationale behind Moody’s decision aligns with the observable absence of a foreseeable fiscal consolidation on the horizon.
Christopher Hodge, Chief Economist for the U.S. at Natixis, articulates the sentiment, stating, “It is hard to disagree with the rationale, with no reasonable expectation for fiscal consolidation any time soon.” The prevailing scenario indicates that deficits are poised to remain substantial, and as interest costs burgeon, a larger share of the budget will inevitably be allocated to servicing the mounting debt burden.
Moody’s, in its official statement, points to the persisting “continued political polarization” within Congress as a risk factor. The agency suggests that this ongoing political divide heightens the likelihood that lawmakers may struggle to reach a consensus on a fiscal plan geared towards arresting the decline in debt affordability.
William Foster, a Senior Vice President at Moody’s, highlights a crucial aspect in an interview, stating that any substantial policy response to address the dwindling fiscal strength might only materialize around 2025, acknowledging the political realities shaping the upcoming year.
As the U.S. House of Representatives, under Republican control, contemplates releasing a stopgap spending measure to avert a potential partial government shutdown, Moody’s shift in outlook adds another layer of complexity to an already intricate fiscal landscape.
Despite this alteration in outlook, it’s important to note that Moody’s maintains its ‘Aaa’ rating for the U.S., citing the country’s enduring credit and economic strengths. However, the shift to a negative outlook injects an element of caution into the broader financial discourse.
In immediate response to Moody’s release, the White House expressed disagreement with the shift to a negative outlook. White House spokesperson Karine Jean-Pierre characterized the change as “yet another consequence of congressional Republican extremism and dysfunction.”
Also Read: US banking industry: S&P Global Joins Moodys in Expressing Concerns
Deputy Treasury Secretary Wally Adeyemo underscored the administration’s commitment to fiscal sustainability. He highlighted measures taken, including over $1 trillion in deficit reduction as part of a June agreement with Congress on raising the U.S. debt limit. Additionally, President Biden’s proposal aims to reduce the deficit by nearly $2.5 trillion over the next decade.
The surge in Treasury yields throughout the year, driven by expectations of the Federal Reserve maintaining a tight monetary policy and U.S.-focused fiscal concerns, has heightened the pre-existing pressure on U.S. debt affordability, according to Moody’s.
While a Moody’s downgrade could potentially exacerbate fiscal concerns, some investors remain skeptical about its material impact on the U.S. bond market. The depth and liquidity of the market position U.S. bonds as a safe haven, a sentiment that persists despite fluctuations.
This development unfolds against the backdrop of a broader political landscape where President Biden, eyeing reelection in 2024, has witnessed a significant dip in public support. A recent New York Times/Siena poll revealed Biden trailing former President Donald Trump in key battleground states, adding an extra layer of complexity to the political landscape.
The Moody’s decision places added pressure on congressional Republicans to advance funding legislation swiftly, steering away from a potential partial government shutdown. House Speaker Mike Johnson, engaged in discussions with the Republican majority, frames Moody’s decision as underscoring the failure of what he deems as Biden’s “reckless spending agenda.”
As the House and the Democratic-led Senate navigate the intricacies of reaching a consensus on a vehicle that President Biden can sign into law before the looming funding expiration on Nov. 17, the specter of a government shutdown looms large.
The internal dynamics within House Republicans add another layer of complexity to the ongoing fiscal deliberations. The delicate balance between budgetary deficits and political posturing remains a critical challenge. While Democrats champion an expansive range of spending plans, Republicans previously championed sharp tax cuts during Donald Trump’s presidency, contributing to the deficit.
In the grand tapestry of U.S. fiscal affairs, both parties grapple with the rising costs of programs like Social Security and Medicare, representing significant slices of federal spending. The Moody’s decision, against this backdrop, reinforces the urgency for a comprehensive and strategic approach to navigate the looming fiscal challenges, avoiding potential pitfalls and ensuring the stability of the broader economic landscape.
Our Reader’s Queries
What is the moody outlook for 2024?
Our outlook for 2024 remains negative due to a combination of factors, including slower projected GDP growth, low interest rates, and increasing asset risks. These risks are particularly evident in the property sector and local government financing vehicles. To mitigate these challenges, it will be important to carefully monitor and manage these risks in the years ahead. Despite these challenges, we remain optimistic about the long-term prospects for the economy and believe that with the right policies and strategies in place, we can overcome these challenges and continue to grow and thrive.
What is the credit outlook for 2024?
In 2024, we anticipate a further decline in credit quality, particularly among lower-rated credits. Nearly 40% of these credits are at risk of being downgraded. Sectors that rely heavily on consumer spending are the most susceptible to this trend.
What is the US credit rating for Moody’s?
Moody’s rating scale already places the US at the highest level with an Aaa rating. As a result, there is no room for an upgrade to a higher rating.
What is a positive outlook for credit rating?
When it comes to rating outlooks, there are three possibilities: ‘Positive’, ‘Stable’, or ‘Negative’. A ‘Positive’ outlook means that the rating could be upgraded in the future. A ‘Stable’ outlook suggests that the rating is expected to stay the same. On the other hand, a ‘Negative’ outlook indicates that the rating may be downgraded. It’s important to keep these outlooks in mind when assessing the potential trajectory of a rating.