The administration of President Joe Biden immediately criticized Moody's for downgrading its assessment of the US credit rating from "stable" to "negative" on Friday, citing significant fiscal deficits and a fall in debt affordability.
Subsequent to months of political wrangling over the US debt ceiling, the sovereign's rating was downgraded by Fitch, another ratings agency, earlier this year.
Investors' concerns about federal expenditures and political division have grown, which has led to a selloff that has brought the price of US government bonds to its lowest point in sixteen years.
It is difficult to argue against the reasoning, according to Christopher Hodge, senior economist for the United States at Natixis, given the absence of realistic expectations for budgetary consolidation in the near term. There will be significant budget deficits in the future, and debt levels will increase as interest expenses consume a larger portion of the budget.
In a statement, this ratings agency stated that there is a greater chance that Congress's ongoing political divisiveness will prevent lawmakers from agreeing on a budgetary plan to halt the decrease in debt affordability.
In an attempt to avert a partial government shutdown, Republicans intend to introduce a temporary budget package on Saturday that would maintain federal agencies' operations when the present funding is due this Friday.
Out of the three leading rating agencies, Moody's stands last to keep the US government top-rated. In August, Fitch revised its rating from triple-A to AA+, matching S&P, which had held the same rating since 2011.
While it revised its outlook, indicating that a downgrade is conceivable over the medium term, Moody's reaffirmed its long-term issuer and senior unsecured ratings at 'Aaa,' citing US credit and financial conditions.
A spokeswoman for the White House, Karine Jean-Pierre, stated immediately following Moody's release that the modification was another result of the extreme and dysfunctional Republican administration in Congress.
Apart from the over $1 trillion in an attempt to reduce deficits included in a June agreement with Congress to raise the US debt limit, the Biden administration has demonstrated its devotion to fiscal sustainability. Additionally, Biden has also proposed reducing the debt by roughly two trillion dollars over the next ten years.
Treasury rates have increased dramatically this year due to concerns over US-focused fiscal policy and predictions that the Fed will maintain tight monetary policy.
According to Moody's, there is now more stress on US debt affordability as a result of the steep increase in Treasury yields.
A downgrade by Moody's might intensify budgetary worries, but investors have expressed skepticism that it would materially affect the US bond market, which is regarded as a safe haven due to its strength and liquidity.
Nonetheless, Quincy Krosby, the chief global strategist of LPL Financial, noted that it serves as a reminder that time is running out and that markets are becoming more aware that another dramatic phase will come that may ultimately result in the government's shutting down.
Biden, who is running for reelection in 2024, has witnessed a dramatic decline in poll popularity; this coincides with Moody's judgment. According to a New York Times/Siena survey issued on Sunday, he is lagging behind former President Donald Trump, the front-runner among Republicans, in five of the six main battleground states: Pennsylvania, Nevada, Georgia, Michigan, and Arizona. Throughout Wisconsin, Biden outperformed Trump. Which candidate wins the presidency will be influenced by the results in those six states.
The Moody's action will also put further pressure on House Republicans to bring financing legislation forward in order to prevent a partial governmental shutdown.
Before the present funding expires on November 17, the House and the Democratic-led Senate have to reach a consensus on a bill that Biden can sign into law.
Internal conflicts among House Republicans have resulted in discussions of a governmental shutdown, but both parties have played a role in budget deficits.
While Republicans forced through significant reductions in taxes early in the presidency of Donald Trump, which also contributed to the deficit, Biden's Democrats have supported a variety of spending initiatives. In the years while Trump was president, the gross national debt increased by around $7.9 trillion. The growing expenses of Social Security and Medicare, which account for a large portion of federal spending, have not been adequately handled by either party.