Trump's policies have a "counterproductive effect"? Moody's warns of deteriorating U.S. fiscal outlook

Moody's warns that Trump's new policies may exacerbate debt burden, downgrades U.S. outlook rating.

On Tuesday, Moody's issued a stern warning, stating that following the downgrade of the U.S. AAA rating outlook to "negative" in November 2023, the fiscal situation in the U.S. has "further deteriorated" and is heading towards "a prolonged recession."

Moody's: Trump's policies exacerbate fiscal weakening

Although Moody's acknowledges the "extraordinary" resilience of the U.S. economy, with the dollar and U.S. Treasury market being pillars of the global financial system, analysts simultaneously warned that the policies of the Trump administration—including comprehensive tariffs and tax cuts—could have a more detrimental than beneficial effect on government revenue.

Moody's stated that the U.S. "debt affordability remains significantly weaker than other AAA-rated and high-rated sovereign countries":

"Sustained high tariffs, unfunded tax cuts, and economic tail risks could negatively impact credit, undermining these strong advantages that continue to offset the expanding fiscal deficit and declining debt affordability outlook."

"In fact, even in very favorable economic and financial environments, fiscal weakening may persist."

Moody's further pointed out:

"The evolving policy agenda of the U.S. government regarding trade, immigration, taxation, federal spending, and regulation may reshape parts of the U.S. and global economy and have significant long-term impacts."

The U.S. credit rating is closely monitored as it plays a crucial role in national debt affordability—higher ratings and positive outlooks typically mean lower borrowing costs.

Global cornerstone beginning to wobble?

Worryingly, this warning comes amid intense debates on Capitol Hill and within the Trump administration about "how to put the U.S. on a more sustainable fiscal path."

Analysts and investors warn that the rapidly rising U.S. debt and deficit may ultimately weaken demand for U.S. Treasuries, which are the cornerstone of the global financial system. Relevant data shows that as of the fiscal year ending September 30, the federal budget deficit reached $1.8 trillion, an 8% increase from the previous year.

At the end of last year, Pimco, one of the world's largest bond management companies, stated that "sustainability issues" had made it cautious about purchasing long-term U.S. Treasuries