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Stock markets fall following downgrade of US credit rating by Moody’s

May 18, 2025

Introduction: US Faces Moody’s Credit Rating Downgrade

Good morning, and welcome to our ongoing analysis of the business landscape, financial markets, and the global economy.

So, how exactly did the US lose its Triple-A credit rating? It seems like it happened gradually, then all at once.

On Friday afternoon, Moody’s delivered a significant blow, announcing it would lower the US government’s debt rating from Aaa to Aa1.

This downgrade comes 14 years after S&P first downgraded the US, with Fitch following in 2023.

Moody’s attributed the downgrade to the increasing national debt, now at a staggering $36 trillion, and the subsequent rise in interest costs:

“Over the past decade, federal debt has surged due to persistent fiscal deficits. While spending has increased, tax cuts led to decreased government revenue. As deficits have grown and interest rates have risen, so too have interest payments on federal debt.”

In response, Treasury Secretary Scott Bessent attempted to downplay the situation during an interview with CNN, stating he doesn’t place much weight on Moody’s ratings.

“We’ve inherited a 6.7% deficit relative to GDP. Our focus is on growing the economy faster than debt to stabilize it,” he tweeted.

Bessent expressed a similar sentiment on NBC’s Meet the Press, saying, “I think Moody’s is a lagging indicator, which is a common perception of credit rating agencies.” He noted that Larry Summers had voiced a similar opinion during the downgrade in 2011.

Investors might agree with this view since Moody’s often reacts to data already presented in the market. However, the US’s borrowing costs have increased in recent years, creating additional fiscal pressures. Moody’s downgrade could compel some bondholders to sell, which might lead to lower prices and higher yields on government bonds.

The timing of Moody’s announcement has raised eyebrows among some Congressional Republicans who oppose a significant tax cut plan proposed by Donald Trump, fearing it could worsen the fiscal outlook.