In what could be the beginning of the end for America’s AAA credit rating, Moody’s has changed its outlook about the country’s fiscal health to “negative” from “stable.” Moody’s could be the last domino to fall after two other major credit rating agencies downgraded America, which has maintained its stellar rating since 1917.

In a report released late Friday, Moody’s said that increasing deficits and political dysfunction are cause for pessimism about America’s fiscal fate.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability,” the firm said in its report. 

“Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” it continues

Moody’s laid out three key reasons why they are keeping the credit rating at AAA for the moment, however. They cite America’s “exceptional economic strength” and projected “positive growth … over the medium term,” the nation’s “institutional and governance strength,” and “the unique and central roles of the US dollar and Treasury bond market in the global financial system.”

The Biden administration and some allies seemed taken aback by Moody’s pessimistic outlook. The deputy Treasury secretary, Wally Adeyemo, said in a statement to Reuters that, “While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook. The American economy remains strong.”

The report comes as a divided government is failing to address key issues, including the widening budget deficit and the long-term debt problem. Speaker Johnson has been having a difficult time uniting his conference around a conservative budget plan, and this week had to pull two of the 12 annual spending bills from the House floor due to lack of support from the GOP. 

With a government shutdown set to begin on Friday night, Mr. Johnson proposed a short-term funding deal during a call with his Republican colleagues on Saturday. He proposed extending some agencies’ lifespan until January 19, while the rest would be extended until February 2. Some Republican members, though, have already come out against the plan. 

On Thursday, a bipartisan group of both Senate and House members unveiled a proposal that would help tackle the debt problem and they think can pass Congress. The lead sponsors, Senators Manchin and Romney, want to establish a 16-member commission that will provide legislative solutions no later than May 2025 to create a long-term, sustainable plan to bring down the debt. 

Moody’s is the only major credit rating firm that still holds America at that AAA level. The other two major credit rating agencies — Standard & Poor’s Global Ratings and Fitch Ratings — both have America’s credit rating at below AAA. 

Standard & Poor’s first downgraded the American rating to AA+ from AAA in August 2011 after President Obama signed the Budget Control Act — a bipartisan piece of legislation aimed at closing the budget deficit by cutting spending and establishing a committee that was meant to produce recommendations for more spending cuts. 

Standard & Poor’s found that legislation insufficient, however, writing that “the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt.” The firm also wrote that they were “pessimistic” about “the difficulties in bridging the gulf between the political parties over fiscal policy.”

Fitch Ratings downgraded the American credit rating to AA+ from AAA in August of this year. They cited the “erosion of governance” and “the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.” Just weeks earlier, President Biden and Speaker McCarthy held contentious negotiations for weeks about how to raise the debt limit.