Moody’s Shocks Markets: U.S. Credit Rating Slashed Over Soaring National Debt
In a move that sent ripples through financial markets, Moody’s Ratings downgraded the United States’ sovereign credit rating on May 16, 2025, stripping the nation of its coveted AAA status. The decision, driven by concerns over the country’s ballooning $36 trillion debt pile, marks a historic moment as all three major credit rating agencies—Moody’s, Fitch, and S&P—now rank the U.S. below the top tier. For everyday Americans, this could mean higher borrowing costs, shaken market confidence, and renewed scrutiny of Washington’s fiscal policies. Here’s what you need to know about this seismic shift and its potential impact.
Why Did Moody’s Pull the Plug on the AAA Rating?
Moody’s lowered the U.S. credit rating from Aaa to Aa1, citing a decade-long surge in government debt and rising interest payments that outpace those of similarly rated nations. The agency pointed to a grim fiscal outlook, projecting federal deficits to swell to nearly 9% of GDP by 2035, up from 6.4% in 2024. This downgrade aligns Moody’s with Fitch Ratings and S&P Global Ratings, which downgraded the U.S. in 2023 and 2011, respectively.
Key Drivers Behind the Downgrade

Skyrocketing Debt: The U.S. national debt has climbed to $36.2 trillion, with projections estimating it will hit 134% of GDP by 2035, a sharp rise from 98% in 2024.
Rising Interest Costs: Higher interest rates and a growing debt burden have increased the cost of servicing Treasury debt, with the fiscal deficit for the current year already at $1.05 trillion.
Entitlement Spending: Programs like Social Security and Medicare are driving expenditure growth, exacerbated by an aging population and stagnant revenue generation.
Policy Uncertainty: Moody’s highlighted political gridlock and debates over extending the 2017 Tax Cuts and Jobs Act, which could add $4 trillion to the deficit over the next decade.

Despite the downgrade, Moody’s shifted its outlook from negative to stable, noting the U.S.’s resilient economy, the dollar’s role as the global reserve currency, and the Federal Reserve’s effective monetary policy as mitigating factors.
What Does This Mean for Americans?
The downgrade could have far-reaching consequences, though past downgrades have shown mixed real-world impacts. While U.S. debt remains a cornerstone of global finance, investors may demand higher yields on Treasury bonds, pushing up borrowing costs across the board. Here’s how this could play out:

Higher Interest Rates: The yield on the 10-year Treasury note rose 3 basis points to 4.48% in after-hours trading following the announcement, signaling potential increases in mortgage and loan rates.
Market Jitters: The iShares 20+ Year Treasury Bond ETF and SPDR S&P 500 ETF Trust fell 1% and 0.4%, respectively, in extended trading, reflecting investor unease.
Consumer Impact: Higher borrowing costs could squeeze households already grappling with inflation and tariffs, making everything from car loans to credit card debt more expensive.
Global Perception: The loss of the U.S.’s final AAA rating may dent its image as the world’s safest investment haven, potentially reducing foreign demand for Treasuries.

However, some experts argue the downgrade is largely symbolic. “Treasurys are still the bedrock of the global financial system,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “The fundamental issue is the growing debt pile, not a sudden loss of creditworthiness.”
Political Firestorm and Policy Debates
The downgrade ignited a political blame game. The White House, under President Donald Trump, pointed fingers at the previous Biden administration, claiming its “reckless spending” fueled the debt crisis. Spokesperson Kush Desai defended the Trump administration’s focus on slashing government waste and passing a comprehensive tax reform bill. Meanwhile, Senate Minority Leader Chuck Schumer called the downgrade a “wake-up call” for Republicans, accusing them of pushing deficit-heavy tax cuts for the wealthy.
The timing is particularly sensitive as Congress debates Trump’s “big, beautiful bill” to extend the 2017 tax cuts. The GOP-led House Budget Committee rejected a sweeping tax package on the same day as the downgrade, with hardline conservatives demanding deeper spending cuts. Moody’s warned that extending the tax cuts could exacerbate deficits, adding fuel to an already heated fiscal debate.
Can the U.S. Bounce Back?
Moody’s suggested that increasing government revenue or curbing spending could restore the AAA rating. However, achieving this in a polarized Congress is easier said than done. Proposals like the Elon Musk-led Department of Government Efficiency, which has led to federal layoffs, aim to reduce expenditure but may not address the structural drivers of debt, such as entitlement programs.
The U.S. also faces a looming deadline this summer, when the debt ceiling must be raised to avoid a default. Past debt ceiling crises, like the 2023 near-default, have fueled rating agencies’ concerns about governance and fiscal responsibility. Without bipartisan action, the U.S. risks further downgrades and economic instability.
Looking Ahead: A Wake-Up Call for Change
Moody’s downgrade is a stark reminder that the U.S.’s fiscal trajectory is unsustainable. While the immediate market reaction may be muted, the long-term implications of unchecked debt growth could reshape the economic landscape. For now, the U.S. retains significant credit strengths, but the clock is ticking for policymakers to address the root causes of fiscal deterioration.
As Americans brace for potential economic ripples, the downgrade underscores a critical question: Can Washington overcome partisan divides to secure the nation’s financial future? Only time will tell, but one thing is clear—this is a moment for bold, decisive action.