Moody’s Downgrades US Credit Rating Amid GOP Tax Cut Dispute

Moody’s Downgrade Causes US Credit Rating Cut Amid GOP Warfare on Tax Strategy

Moody’s shocking downgrade has plunged the USA credit rating to Aa1 from estimable AAA, blaming it on enormous debt and reckless spending. This plunge comes in the wake of the constant struggle within the Republican party over the ever-controversial tax reduction bill spearheaded by President Donald Trump, which some analysts anticipate may contribute trillions to the already 36.2 trillion dollar federal deficit. Economy experts fear this development and the turbulence it causes within international markets will destabilize the United States fiscally sustainble standing in the world.

What is the reason behind Us Credit Rating being downgraded by Moody’s?

The last remaining major ratings agency to hold to the USA’s top tier AAA rating, moody’s cited “large annual fiscal deficits and further deepening interest expenses” as main rationale for the decision. It underscored the growing issues of the American policymakers unwillingness to find a coherent solution to ever rising debt, expected to be 134 percent of gdp in the year 2035, compared to 2024’s 98 percent. May 16 2025 was the exact day this dowgrade announcement was made, coinciding with the unsuccessful trump tax spend cut proposal house budget committee vote. This highlighted trump’s rare political defeat in the context of gop civil war.

GOP’s Tax Cut Plan: A Recipe for Fiscal Chaos?

As a significant aspect of his first-term legacy, President Trump intends to sustain the 2017 Tax Cuts and Jobs Act through extant tax proposals. His draft plan includes lower income tax rates, an increase in standard deduction, and permissive tax policies on tipped income, overtime pay, and senior citizens amounting to $3.72 trillion over the decade. However, nonpartisan analysts assert that adopting these measures will weaken the economy by an additional $4 trillion, deepening the nation’s debt deficit. Concurrently, Speaker of the House Mike Johnson is keen on having it passed by Memorial Day. Progress has stalled due to discord among the GOP’s fiscal hawks. Hardline members, like Ralph Norman, criticize the bill for not making more aggressive cuts to spending, particularly with programmed Medicaid and green energy subsidies.

Republican Split: Fiscal Hawks against Republicans Moderates

The GOP finds itself in a dilemma. Hardline conservatives, concerned about adding to the national debt which currently stands at $36.2 trillion, want to cut spending drastically including slashing $2 trillion off Medicaid and other social safety nets. At the same time, moderate Republicans from battleground districts like New York and California warn such cuts could lose voter support putting the party’s slender 220-213 House majority at risk during the 2026 midterm elections. Further complicating this is the push to remove the cap on state and local tax (SALT) deductions, which is a key concern for legislators in high tax regions. This intra-party conflict has stalled progress on the tax bill, as there is no way forward with the summer debt ceiling deadline approaching.

Market Activity and Effects on the Economy

The recent downgrade by Moody’s has shaken up the financial markets, causing U.S. Treasury securities to fall and their yields to surge on Friday. Experts now expect higher borrowing costs for the US government which may, in turn, have a cascading effect on the economy, impacting everything from fuel mortgage loans to corporate lending. Comments on social media platforms such as X with one user commenting that the downgrade depicts a “wake up call” aimed at tightening fiscal discipline while others highlight an argument claiming it to be politically influenced. “The tax cut assumption by Moody’s downgrade is well-placed, but the GOP dissent makes that highly unlikely,’’ said one user. The uncertainty surrounding the tax bill, in addition to the downgrade, may serve to further unsettle markets that are already suffering from the repercussions of Trump’s recently adopted tariff policies.

What’s Next for the U.S. Economy?

Scott Bessent, the Treasury Secretary, issued a stark warning that actuating no agreements by the middle of July this year could result in the nation defaulting catastrophically. Not aligning with the Trump fiscal agenda may unite the party and provide the sought fiscal sobriety at the cost of eyeing a united front. Deeming the tax plan a “giveaway to billionaires” by the Democrats cements their united opposition forcing the Republicans to face a miserable attempt at the passing of the bill in the Senate. The relentless debate will inform policy direction on the U.S. economy for decades to come.

Why have Republicans split on Trump’s tax bill?

An extreme version of Trump’s tax plan translates into a net loss for the economy suggesting fiscal hawks scaling back the spending counter. Slashing programs as medicaid poses a risk leading to the moderate part of the party impaired facing fierce voter backlash.

How will the tax bill influence the federal deficit?

The nonpartisan estimates indicate that the bill may increase the deficit by 3.72 trillion to 4 trillion dollars within the decade. This would worsen the national debt which is currently sitting at 36.2 trillion dollars.

What happens if the debt ceiling isn’t elevated?

Not increasing the debt ceiling by mid July could potentially result in a US default risking global market stability and causing a catastrophic economic impact.

Disclaimer: This article is not intended as any form of financial guidance and is solely meant for disseminating information. Any moves made as a result of this article fall under the personal responsibility of the reader. For any form of investment, a financial consultant must be sought prior to making any decisions.