Moody’s Downgrades US Credit Rating, Sparks Political Backlash

         

Moody’s downgrades US credit rating to ‘negative,’ drawing criticism from President Biden’s administration. A move that could exacerbate fiscal concerns and heighten market pressure as the nation faces political polarization and rising deficits.

Moody’s Downgrades US Credit Rating

Moody’s has lowered its outlook on the U.S. credit rating to ‘negative’ from ‘stable’ due to large fiscal deficits and a decrease in debt affordability, triggering immediate criticism from the Biden administration.

Impact of Political Polarization and Rising Deficits

The rating downgrade by Moody’s follows a similar action by Fitch earlier this year, highlighting concerns around federal spending and political polarization, which have been unsettling for investors. This has led to a selloff, resulting in the lowest U.S. government bond prices in 16 years.

Concerns Surrounding Fiscal Strength and Policy Response

Moody’s expressed worry about ‘continued political polarization’ in Congress, raising the risk of lawmakers failing to reach consensus on a fiscal plan. Analysts anticipate that any significant policy response to the declining fiscal strength is unlikely until 2025 due to the political calendar next year.

Implications and Reactions

The change in outlook by Moody’s has drawn criticism from the Biden administration, with the White House spokesperson attributing it to ‘congressional Republican extremism and dysfunction.’ Deputy Treasury Secretary Wally Adeyemo emphasized the strength of the American economy and its preeminent safe assets, expressing disagreement with the shift to a negative outlook.

Market Impact and Political Ramifications

The decision has led to a surge in Treasury yields this year, intensifying pressure on US debt affordability. While the downgrade could heighten fiscal concerns, some investors remain skeptical about its material impact on the U.S. bond market, considering it a safe haven due to its depth and liquidity.

Political Implications for President Biden

The credit rating downgrade comes at a time when President Biden’s support has declined sharply in polls, with a New York Times/Siena poll showing him trailing former President Donald Trump in several battleground states. This could increase pressure on congressional Republicans to advance funding legislation and avert a partial government shutdown.

Partisan Conflict over Fiscal Policy

The rating change underscores the ongoing conflict between Democrats and Republicans over fiscal policy. While Democrats have supported extensive spending plans, Republicans passed significant tax cuts early in Donald Trump’s presidency, contributing to the deficit. Both parties have contributed to budget deficits, with a lack of focus on addressing the rising costs of federal spending programs like Social Security and Medicare.

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