At a critical moment in the Republican Party's push for Trump's "Big Beautiful Bill,"Moody'sDowngrade U.S. Credit Rating, Coincidence or Deliberate?
Moody's Ratings announced that it would downgrade the credit rating of the United States from Aaa, the highest level, to Aa1 after the market closed on Friday (May 16). After the downgrade, the United States, the world's largest economy, has been downgraded below the highest rating of AAA by all three major rating agencies.
The timing of Moody's downgrade is particularly sensitive, because earlier in the day, Trump's large-scale tax reform plan failed to pass due to the obstruction of hardline Republicans in the U.S. House Budget Committee. As market participants commented:
The timing is very special, as the GOP is trying to get Trump's "Big Beautiful Bill" through committee…and as we all know, there is no such thing as coincidences in Washington.
Interestingly, in 2012, Trump tweeted that the credit rating of the United States would be downgraded again as a criticism of then-President Obama. However, in the end, the rating agency didn't actually "do it", but now when he is president, the rating has really been downgraded, which is regarded as a "hard slap in the face".
After Moody's announced the downgrade, the market reacted immediately, with major U.S. stock index futures falling and Treasury Bond yields climbing. Strategists on Wall Street generally agree that the downgrade is not a surprise, but will further dampen market confidence and could trigger a correction in the stock market.
The timing of the downgrade is delicate
Just hours before Moody's announced the downgrade, a blocking operation led by hardline Republicans reportedly caused Trump's tax reform bill to fail to pass the House Budget Committee.The House Budget Committee voted 21 to 16 to reject the massive Republican tax and spending bill, Wall Street News mentioned earlier. In this vote, four hard-line Republican representatives — Reps. Chip Roy, Ralph Norman, Josh Brecheen and Andrew Clyde — joined the Democratic camp to vote against the Republican bill.
The hard-line lawmakers threatened to refuse to support the bill unless Speaker Johnson, a fellow Republican, agreed to further cut Medicaid, a Medicaid program for low-income Americans, and repeal Democratic green energy tax cuts.
The Bill, which seeks to extend tax cuts introduced by The Trump administration in 2017, is known as The One, Big, Beautiful Bill, but The bipartisan tax committee estimates it will add $3.72 trillion to The deficit over a decade.
It is worth noting that Moody's warned in the downgrade statement that if the Trump tax reform bill continues, it will add about $4 trillion to the structural deficit of the United States in the next decade. The statement also specifically mentioned:
"Many U.S. administrations and Congress have been unable to agree on measures to reduce the annual fiscal deficit and interest spending, and do not believe that the fiscal package currently under discussion will achieve substantial reductions in mandatory spending and deficits for many years to come."
Moody's also pointed out in the statement that the ratio of government debt to interest payments in the United States has continued to climb in the past decade or so and is now far higher than that of other sovereign countries at the same level. Federal interest expenses are forecast to account for about 30% of fiscal revenue by 2035, up significantly from 18% in 2024 and 9% in 2021.
Wall Street: This Gives U.S. Stocks Reason for a Pullback
AlthoughS&P 500The index has rebounded from last month's trough and has regained ground lost during the year, but many on Wall Street remain skeptical of the rally as the impact of tariffs on business and consumer confidence could be seen in economic data in the coming months.Moody's move further aggravated the complex risks faced by the US market. Wall Street analysts pointed out that this actually gave US stocks a reason to pull back.
JPMorgan ChaseMarko Kolanovic, former chief strategist and co-head of global research, posted on social media:
During the downgrade of the U.S. debt rating in August 2011,S&P 500 ETFDown about 10%, the 20-year U.S. Treasury ETF up about 10% (first 2 weeks of August), and of course other things happened, but for those who didn't enter the market in August 2011, that's a general direction.
Eric Beiley, executive director of wealth management at Steward Partners, said:
"This is a warning sign. U.S. stocks are about to hit a ceiling after a welcome rally. Moody's credit rating downgrade could prompt money managers to take profits after a sharp rally in stocks over the past month."
Max Gokhman, deputy chief Investment officer at Franklin Templeton Investment Solutions, warns:
"The Treasury Bond downgrade is not a surprise in the face of relentless unfunded fiscal spending, which will only accelerate with the current Congressional plan. Moreover, the cost of debt repayment will continue to climb as large investors, both sovereign and institutional, begin to gradually swap U.S. Treasury Bond for other safe-haven assets. Unfortunately, this could exacerbate pressure on U.S. debt, put further downward pressure on the dollar and make U.S. stocks less attractive. "
For his part, Ivan Feinseth, chief investment officer of Tigress Financial Partners, highlighted the potential global impact:
"The U.S. Treasury Bond is seen as the safest investment in the world. When the U.S. credit rating is downgraded, the shock could have a more negative impact on the sovereign debt of other countries. It remains to be seen how this will affect equity markets in the coming weeks, but cautious sentiment could emerge after the recent strong rally in equities."
Michael O'Rourke, chief market strategist at JonesTrading, thinks the market reaction could be similar to what happened when S&P downgraded the U.S. in 2011:
"I expect stocks to experience a round of profit-taking, following a strong rally. When S&P downgraded the US in 2011, the US Treasury Bond initially fell, but then there were safe-haven buying and eventually rebounded higher."
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