Moody’s warns US fiscal strength is eroding amid rising debt costs and policy risks

The United States’ fiscal position is continuing to deteriorate, with Moody’s Ratings warning that rising interest payments and widening deficits are eroding the country’s debt affordability. In its latest report, Moody’s said the fiscal strength of the US has “deteriorated further” since the sovereign outlook was cut to negative in late 2023, and that even under optimistic economic scenarios, debt sustainability remains significantly weaker than other top-rated sovereigns.

The rating agency highlights a sharp rise in interest payments—from 9% of federal revenue in 2021 to a projected 30% by 2035—as the most critical threat to fiscal flexibility. Despite the US dollar’s global reserve status and strong demand for Treasuries, Moody’s cautioned that these strengths may no longer be enough to offset the effects of structurally high deficits, unfunded tax cuts, and growing entitlement costs. It forecasts the federal deficit reaching 8.5% of GDP by 2035, with debt-to-GDP rising to 130%, far above the 43% median for other Aaa-rated sovereigns.

Moody’s also flagged political and policy uncertainty as a mounting risk, particularly around former President Donald Trump’s proposed global tariff plan. The agency warned that new trade barriers could damage business confidence, constrain the Fed’s ability to lower rates, and worsen fiscal pressures. It noted that uncertainty over tax policy, including ambitious but unfunded tax cuts, adds to fiscal vulnerabilities.

Moody’s signalled further that the country’s “extraordinary economic strength” is no longer sufficient to shield it from credit pressures. With Treasury yields expected to average 4.4% in 2025, Moody’s sees limited room for fiscal recovery—absent major policy adjustments or a sharp decline in borrowing costs.

This article was written by Eamonn Sheridan at www.forexlive.com.