Here's Why Moody's 'Negative' U.S. Credit Outlook Matters

Topline

Ratings firm Moody’s lowered its assessment of U.S. credit outlook from “stable” to “negative” Friday, underscoring America’s worsening fiscal standing and the implications of political dysfunction.

firm’s headquarters in Lower Manhattan, NY on September 9, 2011. (Photo by Ramin Talaie/Corbis via Getty Images)

Corbis via Getty Images

Key Facts

Moody’s kept the U.S. at AAA, its highest rating, meaning it’s not a full downgrade, but by lowering its outlook, the firm indicated the rating could slip in the future.

This rating comes amid an increasingly polarized political environment, headlined by infighting among House Republicans that’s paralyzed Congress through a messy speaker fight and an increasing debt load.

Over the spring and summer, the U.S. risked defaulting on its debt after Republicans refused to raise the debt ceiling unless their demands for budget cuts were met by Democrats.

Additionally, as Congress continues to fail to pass a budget, a government shutdown next week appears increasingly likely.

Moody’s assessment suggested it doesn’t believe the U.S. is on the right path to solving these political issues, which threaten the U.S.’ ability to avoid defaults on its debt obligations.

Key Background

This news comes after Fitch, another ratings firm, downgraded its U.S. credit rating from AAA to AA+ in August. S&P Global Ratings, the other of the three major credit ratings firms, downgraded the U.S.’ credit rating in 2011 during an earlier debt limit fight. These credit ratings assess how likely the rating firms believe the U.S. is able to make good on its debt obligations, meaning these lowered ratings indicate lower confidence in the government’s ability to pay, seemingly as a result of political dysfunction.

What To Watch For

How the economy reacts to Friday’s news. After Fitch’s downgrade in August, the stock market saw immediate losses with the Nasdaq Composite falling 2.2% — its worst day in months — the S&P 500 falling 1.4% and the Dow Jones Industrial Average falling 0.9%. S&P Global Ratings’ downgrade in 2011 delivered a much more significant impact, though. On Aug. 8 of that year, a day now referred to as “Black Monday,” the S&P 500 fell nearly 7% in one day. In the month that followed, the index lost another 5.7% and in September it lost another 7.2%, according to Barron’s. However, because that was the first time the U.S. saw its rating fall, experts say its effects were more dramatic. Ryan Detrick, chief market strategist at Carson Group, told CNBC after the Fitch downgrade, “it isn’t nearly the same shock as it was back then.” Another impact experts warn about is that downgrades in the credit could increase interest rates on everything from mortgages to credit cards as part of a domino effect of the federal government being seen as riskier at taking on loans, according to CNBC.

Tangent

If the U.S. were to default on its debts, it would bring catastrophic consequences to the economy, according to most economists. Firstly, not paying back its creditors would be a blow to the U.S. government’s reputation. Darrell Duffie, professor of finance at Stanford’s Graduate School of Business, told NPR in May amid the debt limit fight that a default “would be a disaster and the reputation of the government for meeting its debt obligations would be in tatters.” The U.S. is able to take out trillions of dollars in loans at low interest rates because of its reputation as reliable, but if the government stiffed its creditors, those creditors might be more wary of loaning more money in the future. Additionally, economists say that it could mean the government is temporarily unable to pay its millions of employees, run basic operations like schools and roads and provide vital services like Social Security or veterans benefits. This would likely ripple through the economy and spark a recession, they say. Justin Wolfers, professor of economics and public policy at the University of Michigan, explained to NPR that a debt default “does not reduce our spending,” but rather “it just means we stiff our creditors.”

Chief Critics

Karine Jean-Pierre, the White House press secretary, called Moody’s decision Friday “yet another consequence of congressional Republican extremism and dysfunction” in a statement to multiple news organizations. Republicans, on the other hand, pointed to Democrats, with House Speaker Mike Johnson (R-La.) calling the news “the latest example of the failure of President Biden and Democrats’ reckless spending agenda” in a statement to news organizations.