The credit rating agency Moody's Investor Service downgraded the credit rating for the United States last Friday. The outlook for the rating was changed from stable to negative, while maintaining the country's highest investment rating at AAA. This change reflects concerns about the growing budget deficit of the United States and increasing political polarization. The rating agency emphasized that without effective fiscal policy measures aimed at reducing government spending or increasing revenues, the United States will likely face very large fiscal deficits, significantly weakening the ability to service debt. Fitch earlier this year also lowered the U.S. rating for similar reasons.
The change in the U.S. credit rating may have serious consequences for the treasury bond market. A negative outlook means greater risk and expected higher bond yields, which in turn means that the price of existing bonds falls. The negative outlook from Moody's prompted immediate criticism from President Joe Biden's administration, with White House spokesperson Karine Jean-Pierre and Deputy Secretary of the Treasury Wally Adeyemo expressing opposition to the change and emphasizing the strength of the American economy. Moody's is the last of the three major rating agencies to maintain the highest rating for the U.S. government. Fitch and S&P have already lowered their ratings earlier this year. The implications of this outlook change are significant, especially as it comes at a time when the United States faces challenges such as a potential government shutdown due to disputes over spending measures. Moody's downgrade could also exacerbate fiscal concerns, although some investors remain skeptical.
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Currently, markets are pricing the scenario of bringing inflation down to target with recession avoided as the most likely. However, in the long run, more and more worrisome factors are gathering over the US economy. The problem of rising debt and higher interest rates may begin to affect the US economy in the coming 2024 and 2025. So far, many companies have not yet rolled over their debt at higher interest rates, allowing them to avoid the negative effects of monetary tightening. Next year, the percentage of companies with new higher interest rates will grow which will simultaneously start to affect the US economy. The US leading indicator remains low at levels that have historically indicated an upcoming recession each time. Time will tell whether the baseline scenario of no recession - "golden path" will be achievable this time.
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