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Moody's has changed their outlook on the credit rating of the United States to negative, causing frustration and anger from officials in Washington.

Moody’s has changed their outlook on the credit rating of the United States to negative, causing frustration and anger from officials in Washington.

On Friday, Moody’s changed its assessment of the U.S. credit rating from “stable” to “negative,” pointing to significant fiscal deficits and a decrease in the ability to afford debt. This decision was met with immediate disapproval from the administration of U.S. President Joe Biden.

A different ratings agency, Fitch, downgraded the rating after months of political tension over the United States’ debt ceiling, prompting this action.

Investors have become increasingly worried about the effects of federal spending and political polarization, which has led to a decrease in U.S. government bond prices to their lowest point in 16 years.

Christopher Hodge, the chief economist for Natixis in the U.S., stated that it is difficult to dispute the reasoning behind the lack of hope for fiscal consolidation in the near future. He also mentioned that deficits will continue to be significant and as the budget is increasingly allocated towards interest costs, the national debt will keep increasing.

According to a statement from the ratings agency, the ongoing political division in Congress increases the likelihood that lawmakers will be unable to come to an agreement on a fiscal strategy to address the decrease in debt sustainability.

According to William Foster, a senior vice president at Moody’s, there is unlikely to be a major policy response to the decreasing fiscal strength until 2025 due to the upcoming political calendar next year.

The Republican party, which holds the majority in the United States House of Representatives, plans to unveil a temporary spending bill on Saturday with the goal of preventing a shutdown of the government by maintaining the operation of federal agencies after current funding ends next Friday.

FILE - A cloud hangs over the US House of Representatives in Washington, Oct. 17, 2023.

On October 17, 2023, a cloud of uncertainty looms over the United States House of Representatives in Washington.

Moody’s is the only remaining major rating agency to give the U.S. government its highest rating. In August, Fitch downgraded its rating from triple-A to AA+, following in the footsteps of S&P which has had an AA+ rating since 2011.

Although Moody’s revised its perspective and acknowledged a potential decrease in the future, the agency maintained its Aaa ratings for long-term issuer and senior unsecured ratings, citing the strengths of the U.S. credit and economy.

Right after the Moody’s report came out, Karine Jean-Pierre, a spokesperson for the White House, stated that the alteration was a result of the extreme and dysfunctional actions of the congressional Republicans.

Deputy Treasury Secretary Wally Adeyemo stated that although Moody’s has affirmed the United States’ Aaa rating, he disagrees with their decision to assign a negative outlook. He believes that the American economy is still robust and Treasury securities are highly regarded as secure and easily exchangeable assets worldwide.

Adeyemo stated that the Biden administration has shown its dedication to maintaining fiscal responsibility. This is evident through their implementation of measures that have reduced the deficit by over $1 trillion, as outlined in a June agreement with Congress regarding the increase of the U.S. debt limit. Additionally, Biden has proposed a plan to decrease the deficit by approximately $2.5 trillion in the next ten years.

The rise in Treasury yields this year is due to the belief that the Federal Reserve will maintain a strict monetary policy, as well as concerns about fiscal issues in the United States.

According to Moody’s, the sudden increase in Treasury yields has added to the already existing strain on the affordability of U.S. debt.

A decrease in Moody’s rating could worsen financial worries, but investors remain doubtful that it will significantly affect the U.S. bond market, which is considered a secure option due to its extensive availability and stability.

According to Quincy Krosby, chief global strategist at LPL Financial, this serves as a reminder that time is running out and the markets are nearing a point where they may realize we could potentially face another period of turmoil that could ultimately result in a government shutdown.

Moody’s announcement coincides with Biden’s bid for re-election in 2024 and his declining popularity in recent polls. A survey conducted by the New York Times and Siena College on Sunday revealed that Biden is currently behind former president Donald Trump, the frontrunner for the Republican nomination, in five out of six key states: Nevada, Georgia, Arizona, Michigan, and Pennsylvania. However, Biden maintains a lead over Trump in Wisconsin. The results of these six states will play a crucial role in determining the outcome of the presidential election.

The decision made by Moody’s will add pressure to congressional Republicans to pass funding laws in order to prevent a partial shutdown of the government.

Mike Johnson, Speaker of the U.S. House of Representatives, has been engaged in discussions for multiple days with fellow members of the Republican party’s narrow 221-212 majority. The House and the Senate, currently controlled by Democrats, must come to an agreement on a plan that President Biden can approve before the current funding runs out on November 17th.

On X, formerly known as Twitter, hardline Republican Representative Andy Harris stated that it is not morally right to keep giving unlimited funds to the federal government when we are aware that our future generations will have to bear the burden of the biggest debt in US history.

There has been internal strife among House Republicans, causing discussions about potential government shutdowns. However, it should be noted that both parties have played a role in creating budget deficits.

The Democrats under Biden have supported various spending proposals, while the Republicans under Donald Trump’s leadership implemented significant tax reductions at the beginning of his term, contributing to the deficit. However, neither party has adequately tackled the escalating expenses of Social Security and Medicare, which make up a substantial portion of federal expenditures.