Moody’s downgrade raises U.S. borrowing costs

[UNITED STATES] Moody’s recent downgrade of the U.S. credit rating may carry significant financial consequences for American consumers, according to market analysts. The rating agency’s decision immediately pushed bond prices lower and yields higher on Monday. The 30-year U.S. Treasury yield rose above 5%, while the 10-year yield topped 4.5% — critical thresholds amid growing economic pressures from President Donald Trump’s tariff policies. Bond prices and yields move inversely.

The downgrade comes at a precarious moment for markets already grappling with geopolitical tensions, slowing global growth, and uncertainty surrounding domestic fiscal policy. While the U.S. economy remains relatively sturdy, experts caution the downgrade could stir added volatility, especially if other credit rating agencies follow suit or if foreign investors begin reassessing their holdings in U.S. government debt.

Treasury yields play a key role in determining interest rates for a broad range of consumer loans, from 30-year fixed-rate mortgages to credit cards and auto loans. “It’s really hard to avoid the impact on consumers,” said Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute.

Beyond market reaction, the downgrade raises deeper concerns about the long-term health of U.S. fiscal policy. With the federal deficit expected to surpass $1.6 trillion this year, some economists warn of worsening debt management challenges in an era of rising entitlement costs and persistent gridlock over budget reforms. “This isn’t just a short-term market reaction — it’s a warning sign about structural issues,” said Mark Zandi, chief economist at Moody’s Analytics.

Moody’s Cuts U.S. Rating from Aaa to Aa1

On Friday, Moody’s downgraded the U.S. sovereign credit rating one notch to Aa1, citing the growing burden of federal deficits. The agency flagged ongoing efforts by Republicans to make President Trump’s 2017 tax cuts permanent — a move that could add trillions to the national debt — as a key concern.

“When our credit rating goes down, the expectation is that the cost of borrowing will increase,” said Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

Higher borrowing costs often follow credit downgrades because lenders demand greater compensation for taking on additional risk, Johnson explained.

This impact isn’t limited to individuals. Small and midsize businesses — which often rely on variable-rate financing — may also feel the pinch. “If corporate borrowing becomes more expensive, it could dampen investment and hiring, further slowing economic growth,” noted Diane Swonk, chief economist at KPMG. Such a slowdown could feed into a broader cycle of weaker growth and rising debt burdens.

Consumers Face ‘Higher for Longer’ Interest Rates

For Americans already struggling under high interest rates, Moody’s decision offers little relief. “Economic uncertainty, especially around tariffs, has the Fed — and a lot of businesses — on pause,” said Ted Rossman, senior industry analyst at Bankrate.

Atlanta Federal Reserve President Raphael Bostic said Monday on CNBC that he now expects just one rate cut this year as the central bank attempts to juggle inflation concerns with looming recession risks. Fed Chair Jerome Powell has also warned that tariffs could curb growth and push prices higher, complicating plans to ease monetary policy.

Douglas Boneparth, a CFP and president of Bone Fide Wealth, said the downgrade could lead to persistently high interest rates across various consumer lending products.

“Downgrades can raise borrowing costs over time,” Boneparth said. “Think higher rates on mortgages, credit cards, and personal loans, especially if confidence in U.S. credit continues to erode.”

Which Loans Could See the Biggest Impact?

Some consumer loans, such as 30-year mortgages, are directly influenced by changes in Treasury yields. “Longer-term mortgage rates are going to be most closely correlated, and those are already ticking up,” said Rehling.

As of May 16, the average rate for a 30-year fixed mortgage was 6.92%, while a 15-year fixed was 6.26%, according to Mortgage News Daily. While credit card and auto loan rates are more closely linked to the federal funds rate, broader fiscal instability can influence how the Fed sets that benchmark. “The fed funds rate is higher than it would be if the U.S. was in a better fiscal situation,” Rehling added.

Since December 2024, the federal funds rate has held steady between 4.25% and 4.5%. That’s kept average credit card APRs at 20.12%, only slightly below last summer’s record high of 20.79%, according to Rossman. Because card rates typically mirror Fed policy, Rossman said consumers should expect interest rates to stay elevated through the rest of the year.

Moody’s was the last of the three major credit rating agencies to maintain the U.S. at the top-tier Aaa rating. Standard & Poor’s downgraded the nation’s rating in August 2011, and Fitch followed suit in August 2023.

“We’ve been through this before,” Rehling said. Still, he acknowledged the downgrade underscores deeper concerns about America’s fiscal trajectory. “The U.S. still maintains its dominance as the safe haven economy of the world, but it puts some chinks in the armor,” he said.