U.S. Credit Downgrade Rattles Markets in Run-up to Budget and Debt Standoff
Credit rating agency Moody's alarmed markets Friday with a downgrade of U.S. sovereign debt from a perfect “AAA” score “AA1.” The change will increase borrowing costs for the country's $36 trillion in debt, set to grow further under current budget proposals being debated by the House and Senate. Other ratings agencies made similar ratings downgrades in 2011 and 2023.
House Speaker Mike Johnson (R - LA) is pushing for passage of the so-called “Big Beautiful Bill” by Memorial Day, or Monday, May 26th. Current Senate proposals call for a $5 Trillion increase in the debt ceiling, with the House calling for $4 Trillion. Ultimately, Senate proposals are likely to prevail as President Trump will demand resolution to bring some certainty amidst the backdrop of the chaotic rollout of tariffs, bringing increased volatility to markets.
Democrats have argued that Republicans have been inconsistent in their rhetoric calling for decreased spending while simultaneously insisting on preserving tax cuts seen as primarily benefiting the wealthiest Americans. Some Republicans have also blocked new tax cuts, such as President Trump's proposal for “no tax on tips” over perceptions that they would contribute further to budget deficits.
The Moody's downgrade comes while the treasury is already engaged in “extraordinary measures” to stretch government funds, having reached the statutory debt limit in January. However, the company did not cite default concerns in explaining the ratings change, focusing instead on the level of debt itself, leading some to conclude that the change was politically motivated.
Stephanie Kelton, an economist who has argued that current debt levels are relatively modest compared to GDP, speaking to America 2.0 on Saturday said, “I think it's always political with the big three ratings agencies. I was worried about a voluntary default months ago, [but] those fears have all but disappeared as I've watched and listened to Bessent, Miran, etc.”
Treasury Secretary Bessent recently urged Congress to resolve the debt ceiling issue by July to avoid default risks. He has said the U.S. will reach the “X-Date,” the date on which the government will default on its debts, as soon as August.
The prospect of voluntary default, triggering an economic crisis, has been raised by a variety of politicians and analysts, especially in the context of growing U.S. debt and disagreements over monetary policy, and specifically the legitimacy of the Federal Reserve. Rep. Thomas Massie (R - Kent.) has sponsored legislation to “End the Fed” in both 2024 and 2025. However, the prospect of introducing yet another self-induced financial shock amid existing tariff volatility seems to hold little appeal at the present moment.
Default risks still exist, though they do appear diminished at the moment. If the House and Senate are unable to complete reconciliation successfully and bring a vote to the floor soon, risks will increase rapidly. Other systemic risks could intervene as well, if they cause Congress to be diverted from addressing the budget and debt measures included in the “big” bill. The current budget continuing resolution expires September 30.
As of Sunday, May 18, the Dow (+0.36%), S&P (+0.26%), and NASDAQ (+0.02%) market futures indices reflect slight gains ahead of Monday trading.
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