Moody’s Investors Service announced a downgrade of the US credit rating, citing surging federal debt, rising interest payments, and long-term revenue challenges.

The Moody’s downgrade drops the nation’s credit rating from its top-tier AAA status, marking a historic shift in the agency’s long-held confidence in US credit stability. This action follows similar moves by Fitch in 2023 and Standard & Poor’s back in 2011.

Moody’s downgraded the US credit rating by one notch, more than a year after shifting its outlook to negative. The credit assessor now maintains a stable outlook.

According to a Moody’s press release:

 

Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher.

The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

Rising Debt and Fiscal Pressures

According to Moody’s, federal deficits could surge to nearly 9% of GDP by 2035, climbing from 6.4% in 2024, as the country’s fiscal outlook strains under mounting entitlement spending and insufficient revenue generation.

At the same time, ongoing federal budget negotiations add another layer of uncertainty. Proposals on the table include sharp spending reductions, stricter work requirements for Medicaid and SNAP, and adjustments to the SALT deduction cap — all of which could impact state and local revenues. The standoff has stalled movement on the legislation, heightening uncertainty around federal fiscal stability.

Impact on Maryland and Counties

The downgrade arrives just days after Maryland lost its AAA bond rating, as previously reported on Conduit Street. The ripple effects of federal fiscal instability could be significant for Maryland’s counties.

A weaker US credit rating may increase borrowing costs for state and local governments, driving up interest rates on critical infrastructure projects like schools, roads, and community facilities.

That said, the market’s reaction isn’t always immediate or dramatic. After the S&P downgrade in 2011, borrowing costs didn’t spike as much as predicted because investors still see US debt as safe. However, with persistent inflation pressures and ongoing federal budget uncertainty, counties could feel the squeeze this time.

Stay tuned to Conduit Street for more information.