Why has the US lost its AAA credit rating, and why does it matter?

Last week, Moody’s downgraded the credit rating of the United States due to concerns over its $36 trillion debt pile. The move sent ripples through financial markets and could complicate President Donald Trump’s efforts to cut taxes.

The Moody’s rating agency dropped the US government’s credit score by one notch from the pristine Aaa to Aa1. It cited rising debt and interest costs “that are significantly higher than similarly rated sovereigns.”

Last week’s cut followed a downgrade by rating rival Fitch, which lowered the US credit score by one notch in 2023. Fitch was the second major rating agency to strip the US of its AAA rating after Standard & Poor’s did so in 2011.

Investors use credit ratings to assess the risk profile of companies and governments. The lower a borrower’s rating, the higher its financing costs.

“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said in a news release last week.

“Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues,” it said.

The downgrade marked the first time Moody’s has lowered Washington’s credit score since 1949, the year it began rating US government debt.