Friday night Moody’s made that credit downgrade public. This ruling has upended the fiscal condition of the United States in ways we are only just beginning to understand. This downgrade represents a seminal moment in U.S. fiscal policy as the nation continues to face an ever-increasing debt crisis. This downgrade is a reflection of escalating concerns regarding the growing fiscal deficit. Recent political pledges, most notably Vice President Kamala Harris’s and former President Donald Trump’s, would add trillions to the tab that we’re already stretched too thin to afford.
According to the Committee for a Responsible Federal Budget, Kamala Harris’s campaign promises would contribute an estimated $3.95 trillion to the national debt. Policies linked to Trump are estimated to be much more costly—about $7.75 trillion. This fiscal burden poses fundamental and pressing concerns regarding the sustainability of U.S. fiscal policy. It presents possible long-term effects on economic stability.
The Downgrade and Its Implications
Moody’s recent decision to downgrade the U.S. credit rating should be interpreted as an alarming trend for investors and policymakers, alike. The U.S. has averted a fiscal crisis, but at the enormous costs of losing its triple A credit rating. This triple-A credential had been owned since before S&P first downgraded the nation’s credit rating in 2011. As it is, the U.S. now holds the lowest possible credit rating of Aa1, a testament to the deep worries about the country’s fiscal wellbeing.
Riggs’ thinks the downgrade is a warning against the enormous scope of the U.S. debt situation. This concern has only grown since 2011. Since October 2023, the fiscal deficit has ballooned. This increase in the deficit has increased dependence on foreign financing, and it is exacerbated by China’s waning desire to help finance the U.S. fiscal deficit.
In addition to the implementation of these transformative developments, the economic impact is already being felt. The dollar was noted as the weakest performer in the G10 foreign exchange space last week, illustrating a loss of confidence among global investors.
Rising Interest Rates
In reaction to these economic headwinds, bond markets are seeing historic volatility. The yield on the 10-year Treasury note skyrocketed to multiyear highs. This spike is reminiscent of the panic felt during the tariff episode last spring. This increase in yields shows that investors are really scared about the fiscal sustainability of the U.S.
Moreover, the 30-year yield recently breached the 5% mark for the first time since 2023, further signaling rising costs of borrowing for both consumers and businesses. The impacts of such hikes are disastrous, raising the cost of mortgages and making corporate decisions to finance projects more expensive.
The way that the market is currently pricing those expectations implies that investors are looking for less than two rate cuts from the Federal Reserve. This gloomy outlook holds for the remainder of 2023. This dour view comes amid a larger anxiety over inflationary tides and growth potential in the eyes of lawmakers as debt accrues.
Impact on U.S. Equities
This welcome reversal gave a U.S. equities the edge over their European counterparts last week even as the bond market remained contentious. Even worries about increasing interest rates couldn’t dent their durability. This performance is being fueled by strong corporate earnings reports. The biggest reason investors are confident that U.S. companies can better shoulder any such economic storm clouds than their international peers.
Investors seem to be judging future political scenarios and their fiscal effects as they evaluate their investments. The policy prescriptions of candidates such as Kamala Harris and Donald Trump couldn’t be more different. Their very different visions for addressing America’s expanding debt crisis would have a direct and profound impact on how the markets perform.
As political campaigns ramp up in advance of next year’s elections, debates over fiscal responsibility will probably be impossible to avoid. Candidates’ proposals and their financial ramifications will be closely watched by analysts and investors.