Moody's Strips the U.S. of Its Last AAA Rating. Then Congress Advanced the Budget Bill.

The United States lost its last perfect credit rating Friday when Moody’s Ratings downgraded U.S. sovereign long-term debt from Aaa to Aa1 — ending a 107-year run at the top of the agency’s scale and making the United States the first major economy in history to be stripped of a perfect rating by all three principal credit agencies.

S&P Global downgraded the United States from AAA to AA+ in August 2011, during the debt-ceiling standoff of that summer. Fitch Ratings followed in August 2023. Moody’s, which maintained its Aaa rating through both of those episodes, had been the last major holdout. As of Friday evening, the United States holds Aa1, AA+, and AA+ — the second tier on all three major scales — with no realistic prospect of any agency restoring the top rating in the near term.

The immediate market reaction arrived Monday morning: the 10-year Treasury yield climbed to 4.56 percent in early trading, its highest since late 2023, while the 30-year yield briefly topped 5.03 percent — a level not seen since November 2023. The S&P 500 opened down approximately 1 percent before recovering most of the loss through the morning session. By midday, Treasury buyers had stepped in and yields retreated from their highs, a pattern that followed both previous major U.S. credit downgrades. The dollar weakened modestly against the euro and yen.

What Moody’s Said — and Why Now

The ratings action is worth reading carefully. Moody’s was explicit that it does not believe the United States is at meaningful risk of default. Its concern is structural rather than acute: the interaction between rapidly rising interest costs on a large debt stock and an apparent inability of successive Congresses to address either side of the equation.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency wrote in its statement. The current fiscal year — which began October 1 — is already running a $1.05 trillion deficit, 13 percent higher than the same period a year ago.

The agency’s projections are specific. Federal deficits are projected to reach nearly 9 percent of GDP by 2035, up from 6.4 percent now. Federal debt is projected to rise to approximately 134 percent of GDP by 2035, compared to 98 percent today. Interest expense on the debt is projected to consume more than 30 percent of federal revenue by 2035, up from roughly 18 percent currently — a crowding effect that limits the government’s capacity to respond to economic shocks without adding further to the debt.

Moody’s also specifically addressed the fiscal consequence of extending the 2017 Tax Cuts and Jobs Act, which expires at the end of this year. Under its base case — assuming extension — the law adds approximately $4 trillion to the federal fiscal primary deficit over the next decade. The agency noted that “current fiscal proposals under consideration” will not reverse this trajectory, language chosen to encompass the budget reconciliation package moving through the House without naming it explicitly.

The agency changed the ratings outlook from “negative” to “stable” alongside the downgrade, signaling it does not expect a further cut in the near term. That shift is a concession to the United States’ considerable structural advantages — reserve currency status, deep capital markets, rule of law — even as the fiscal trajectory deteriorates.

The Budget Bill Advanced the Same Weekend

The collision of timing between Moody’s downgrade and the House Budget Committee’s vote on the One Big Beautiful Bill Act was, depending on one’s view, ironic, predictable, or irrelevant.

The Budget Committee had initially failed to advance the reconciliation package on Friday, the same day as the Moody’s action, when four conservative Republican members — Chip Roy of Texas, Ralph Norman of South Carolina, Andrew Clyde of Georgia, and Josh Brecheen of Oklahoma — voted against the measure alongside all Democratic members, producing a 21-16 defeat. The four holdouts pressed for steeper spending cuts and faster implementation of Medicaid work requirements.

Over the weekend, Republican leadership secured enough commitment from the holdouts that when the committee reconvened Sunday night, all four voted “present” rather than “no,” allowing the bill to advance on a 17-16 margin. Their change in strategy — from voting against to declining to block — reflected concessions on accelerating Medicaid work requirement start dates and speeding the phaseout of clean energy subsidies, but not the level of overall spending cuts the four had originally demanded.

Treasury Secretary Scott Bessent, appearing Sunday on CNN’s State of the Union, was asked directly about the downgrade and its relationship to a bill that would expand the deficit. “I don’t put much credence in the Moody’s” downgrade, Bessent said, framing the administration’s position as growth-first: that economic expansion driven by the tax package would reduce deficits as a share of GDP even as absolute debt rose. Budget Director Russell Vought called the bill a measure that “ends decades of fiscal futility.” Speaker Mike Johnson said the downgrade demonstrated the need for the legislation.

The Democratic counter was more concrete. “What that means is higher interest rates for anybody out there who is trying to start a business or to buy a home,” said Senator Chris Murphy of Connecticut. The nonpartisan Committee for a Responsible Federal Budget, in analysis released before the downgrade, estimated the full bill could add between $3.2 trillion and $5.2 trillion to the national debt over the next decade, depending on which provisions survive the Senate.

What This Costs Ordinary Americans

The Moody’s downgrade does not automatically trigger legal consequences. No law or regulation requires institutional holders of U.S. Treasuries to sell on a rating cut, and the Federal Reserve’s operations are not rating-contingent. The practical impact is subtler: it is a price signal that affects the rate at which the government and private borrowers refinance debt.

The 10-year Treasury yield is the benchmark that mortgage lenders use to price 30-year fixed-rate loans. Monday’s move, if it holds, will translate into slightly higher borrowing costs on new mortgages and any variable-rate consumer or business debt tied to Treasury benchmarks. That pressure arrives on top of the oil price shock and supply-chain disruption from the Hormuz conflict, which has already pushed energy and transportation costs higher across the economy.

The cost of borrowing for the federal government itself is the more significant long-run concern. At $36 trillion in outstanding debt, a sustained 10 basis point increase in the average refinancing rate adds roughly $36 billion annually to interest expense. The trajectory Moody’s projects — interest consuming 30 percent of federal revenue by 2035 — is not an abstract concern. It represents a structural constraint on every future government’s ability to spend, cut taxes, or respond to a crisis.

The Federal Reserve’s First Test Under Warsh

For Kevin Warsh, confirmed as Federal Reserve chair by a 54-45 margin just five days ago in the narrowest confirmation vote in Fed history, Monday’s events are his first live test of communicating the Fed’s independence under conditions of heightened fiscal stress.

Warsh’s confirmation margin was itself a market signal — the first time a Fed chair nomination generated meaningful Senate opposition on the floor. Markets have been pricing in elevated policy uncertainty since his confirmation, and the Moody’s downgrade adds to that backdrop without creating an entirely new one.

The Fed does not control the fiscal trajectory Moody’s cited. It controls the interest rate, and under both its existing mandate and Warsh’s stated posture, the rate path will follow inflation and employment data, not political pressure. But the combination of a second-tier credit rating, elevated yields, a budget bill moving toward passage, and a narrowly confirmed chair creates a communications environment with no modern precedent.

What Comes Next

The One Big Beautiful Bill Act moves from the Budget Committee to the House Rules Committee, which will write the rule governing floor debate. A full House floor vote is expected by the end of the week, though the holdout bloc has signaled it may yet demand additional concessions before the floor vote proceeds.

The Senate path is materially harder. Republicans hold a narrower margin there, and several members of the Senate Finance Committee have already signaled discomfort with specific Medicaid and clean energy provisions. Senate leadership will need to accommodate both the House’s conservative bloc and its own moderate members — a set of constraints that will almost certainly produce a bill substantially different from what the House passes.

What Moody’s has done, practically speaking, is added a new and durable reference point to every Senate floor debate about fiscal policy for the foreseeable future. The argument that U.S. Treasuries are categorically different from other sovereign debt has long rested partly on the pristine rating. That argument is harder to make Monday than it was last Thursday.