NEW YORK: Moody’s lowered its outlook on the US credit rating from ‘negative’ to ‘stable’, citing large budget deficits and falling debt affordability, a move that immediately sparked criticism from President Joe Biden’s administration.

This decision follows a downgrade of the sovereign rating by another rating agency, Fitch, this year, after months of brinkmanship around the US debt ceiling.

Federal spending and political polarization are a growing concern for investors, contributing to a selloff that has brought U.S. government bond prices to their lowest levels in 16 years.

“It is difficult to disagree with this reasoning, given that it is not reasonable to expect fiscal consolidation in the near future,” said Christopher Hodge, chief economist for the states. -United at Natixis. “Deficits will remain large…and, as interest charges take up a larger share of the budget, the debt burden will continue to rise.” The rating agency said in a statement that “continued political polarization” in Congress increases the risk that lawmakers will not be able to reach consensus on a budget plan to slow the decline in health affordability. debt. »

“Any kind of meaningful policy response we might make to this decline in fiscal strength likely won’t happen until 2025 because of the reality of next year’s policy calendar,” said William Foster, senior vice president of Moody’s, to Reuters. in an interview.

Republicans, who control the U.S. House of Representatives, expect to release a stopgap spending measure on Saturday aimed at avoiding a partial government shutdown by keeping federal agencies open when current funding expires next Friday.

Moody’s is the last of the three major rating agencies to maintain a high rating for the U.S. government. Fitch changed its rating from triple A to AA+ in August, joining S&P which has enjoyed an AA+ rating since 2011.

While changing its outlook, indicating a downgrade is possible in the medium term, Moody’s affirmed its long-term and senior unsecured issuer ratings at ‘Aaa’, citing the credit and economic strength of the United States.

Immediately after Moody’s release Friday, White House spokeswoman Karine Jean-Pierre said the change was “yet another consequence of extremism and Republican dysfunction in Congress.” Although Moody’s statement maintains the United States’ Aaa rating, we disagree with the move to a negative outlook.

The U.S. economy remains strong and Treasury securities are the world’s leading safe and liquid asset,” Deputy Treasury Secretary Wally Adeyemo said in a statement.

Adeyemo said the Biden administration has demonstrated its commitment to fiscal sustainability, including through more than $1 trillion in deficit reduction measures included in a June deal with Congress on raising the ceiling of US debt, and Biden’s proposal to reduce the deficit by almost $2.5 trillion over the period. the next decade.

Treasury yields have climbed this year on expectations that the Federal Reserve will maintain tight monetary policy, as well as U.S.-centered fiscal concerns.

The sharp rise in Treasury yields “has increased pre-existing pressure on the affordability of U.S. debt,” Moody’s said.

A Moody’s rating downgrade could exacerbate fiscal concerns, but investors say they are skeptical about its significant impact on the U.S. bond market, considered a safe haven because of its depth and liquidity.

However, it reminds us that time is running out and markets are moving ever closer to the fact that we could enter another dramatic period that could ultimately lead to a government shutdown,” said Quincy Krosby, Chief Global Strategist at LPL. Financial.

Moody’s decision also comes as Biden, who is seeking re-election in 2024, has seen his support fall sharply in polls. A New York Times/Siena poll released Sunday shows him trailing former President Donald Trump, the leading Republican candidate, in five of six battleground states: Nevada, Georgia, Arizona, Michigan and Pennsylvania. Biden was ahead of Trump in Wisconsin.

The outcome in these six states will help determine who wins the presidential election.

Moody’s decision will also increase pressure on congressional Republicans to advance funding legislation to avoid a partial government shutdown.

U.S. House Speaker Mike Johnson, who has spent days talking with members of his slim 221-212 Republican majority over several stopgap measures, said Moody’s decision highlighted the failure of what he called Biden’s “reckless spending program.” “Our $33.6 trillion debt is unsustainable and poses a danger to our national security and economy,” he said in a statement. “We are going to fight to get our finances back in order.”

The House and Democratic-led Senate must agree on a vehicle that Biden can sign before current funding expires on November 17.

Infighting among House Republicans has led to flirting with a government shutdown, but both parties have contributed to budget deficits.

Biden’s Democrats supported a wide range of spending plans, while Republicans pushed through deep tax cuts early in Donald Trump’s presidency, which also fueled the deficit. The total gross debt of the United States increased by approximately $7.9 billion during Trump’s years in office. Neither party has seriously addressed the rising costs of Social Security and Medicare programs, which account for a significant portion of federal spending.

Published in Dawn, November 12, 2023

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