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The last bastion has fallen: the United States has lost its pristine credit status. With the downgrade of the U.S. sovereign credit rating from “Aaa” to “Aa1,” the three major agencies — Fitch, S&P, and now Moody’s — have ended the illusion of unlimited fiscal strength.
The reasoning is simple: skyrocketing deficits and a debt burden increasingly choked by interest payments. According to the Committee for a Responsible Federal Budget, interest payments on the debt are projected to surpass a record 3.2% of GDP this year and exceed $1 trillion next year.
According to Moody’s, without significant changes in tax and spending policies, the US will face increasingly limited budget flexibility. By 2035, mandatory spending, including interest payments, is projected to account for about 78% of total federal spending, up from 73% in 2024.
To make the picture even worse, if the Tax Cuts and Jobs Act of 2017, which just received approval from a key congressional committee to proceed, were extended, it could add about $4 trillion to the primary federal deficit (excluding interest payments) over the next decade.
Markets reacted on Monday with Treasury yields soaring, while Nasdaq, Russell 2000 and S&P 500 futures opened in the red. In this context, Donald Trump could increase pressure on Chairman Powell to lower rates regardless of inflationary risks stemming from trade wars.
Could this be the start of another sharp downturn?
There has been some progress on the trade front — the U.S. and China agreed to a mutual 90-day tariff reduction — but that alone has not been enough to turn the overall picture positive. Even on the tariff issue, many open questions remain, and little real progress has been made to date.
On monetary policy, there is little hope that Fed officials like Bostic, Jefferson, Williams, Logan, Barkin, Collins, Musalem, Kugler, and Hammack will soften their tone in their public appearances this week. Inflation remains a concern, and rising import tariffs could continue to fuel upward pressure on prices.
