The fiscal situation in the United States is worsening, with Moody’s Ratings indicating that rising interest payments and increasing deficits are affecting debt affordability. The agency reported that the fiscal strength of the US has declined since the outlook was downgraded to negative in late 2023, with debt sustainability expected to remain weaker compared to other highly rated sovereigns.
Interest payments are projected to rise from 9% of federal revenue in 2021 to 30% by 2035, posing a threat to fiscal flexibility. Moody’s predicts that the federal deficit will reach 8.5% of GDP by 2035, with debt-to-GDP ratio climbing to 130%, surpassing the 43% median for other Aaa-rated countries.
Rising Fiscal Pressures
Political and policy uncertainty is also seen as a risk, particularly concerning former President Donald Trump’s proposed tariff plan. New trade barriers could negatively affect business confidence and constrain the Federal Reserve’s ability to lower interest rates, intensifying fiscal pressures.
Moody’s pointed out that the US’s economic strength is no longer enough to protect it from credit pressures. With Treasury yields expected to average 4.4% in 2025, limited scope for fiscal recovery exists unless major policy changes are implemented or borrowing costs decline sharply.
The latest assessment from Moody’s underscores just how fast the United States’ fiscal position is deteriorating. It is no longer just about deficits and borrowing—rising interest costs are making debt harder to manage. When a greater share of revenue goes towards servicing debt, less funding is available for other priorities, limiting economic flexibility. This trajectory is concerning for markets that depend on long-term stability.
Debt sustainability is now being evaluated in direct comparison with other highly rated sovereigns, and the gap is widening. While a debt-to-GDP ratio of 130% by 2035 may have once seemed distant, current projections indicate it is edging closer at a faster pace. Against the backdrop of similar economies, which are holding stable at far lower levels, the United States’ relative strength is being questioned. A higher debt burden tends to lead to higher yields, which in turn makes borrowing more expensive—a self-reinforcing cycle that rarely resolves without intervention.
Political And Policy Risks
Political risks are adding further uncertainty. Since policy shifts influence future borrowing costs and economic activity, any hints of drastic changes attract attention. Trump’s proposed tariffs, for instance, could introduce new costs for businesses, leading to shifts in capital allocation. If such policies dampen economic confidence, the Federal Reserve’s ability to adjust rates in response to changing conditions may be constrained. This makes it harder to counteract downturns, adding further complications to an already challenging fiscal backdrop.
Lowering debt costs is now a more difficult task. Treasury yields are expected to remain elevated next year, with estimates around 4.4%. Without a sudden pivot in policy or an unexpected shift in borrowing costs, there are fewer options for fiscal relief. Moody’s highlights that economic resilience alone is no longer enough to offset these vulnerabilities. The belief that the United States can maintain credit stability purely on its economic size and influence is being tested.
Given these elements, decisions surrounding risk exposure must account for both fiscal and political shifts. Reducing uncertainty in allocation strategies will require a sharper focus on policy developments and movements in yield expectations.
