U.S. Treasury Secretary Janet Yellen dismissed a recent downgrade of the U.S. credit outlook by Moody’s Ratings, calling it “overly pessimistic” and politically driven, as debates intensify in Washington over the long-term fiscal implications of reinstating former President Donald Trump’s sweeping tax cuts.
Moody’s earlier this week revised its outlook on U.S. government debt from “stable” to “negative,” citing concerns over ballooning deficits and growing political dysfunction. While the agency stopped short of cutting the nation’s AAA rating, it warned that partisan gridlock and expansionary fiscal plans—especially renewed tax cuts—could erode the country’s creditworthiness.
Speaking to reporters at a financial summit in San Francisco, Yellen sharply rejected the downgrade. “The U.S. economy remains fundamentally strong, and our debt is sustainable,” she said. “This outlook adjustment fails to reflect the resilience of our institutions and the seriousness with which we approach long-term fiscal health.”
Yellen’s comments come as Republicans in Congress, emboldened by Trump’s return to power, push for a full reinstatement of the 2017 Tax Cuts and Jobs Act, which is set to expire in 2026. The GOP argues that extending the tax breaks will boost economic growth and support the middle class.
However, Democrats and many economists warn that doing so without offsetting revenue increases could deepen fiscal imbalances. The Congressional Budget Office (CBO) estimates that renewing the tax cuts in their entirety would add roughly $3.5 trillion to the federal deficit over the next decade.
Moody’s cited this very scenario in its outlook revision, pointing to “a lack of credible fiscal consolidation plans” as a major risk. The agency also highlighted rising debt servicing costs, which have surged as the Federal Reserve maintains elevated interest rates to combat inflation.
Republican lawmakers, however, welcomed the downgrade as evidence of the need to reduce government spending. “The warning from Moody’s should be a wake-up call,” said House Speaker Mike Johnson. “We cannot keep borrowing endlessly. It’s time to rein in reckless spending.”
In contrast, Yellen argued that tax reform must be part of a broader and balanced fiscal framework that includes revenue increases from the wealthy and corporations, as well as targeted spending restraint. She also stressed that the downgrade was not a verdict on the U.S. economy but rather a reaction to political uncertainty—something she says Congress has the power to address.
Markets have so far shrugged off the downgrade, with U.S. Treasury yields and the dollar remaining largely stable. However, analysts say continued political gridlock over fiscal policy—especially approaching the 2026 expiration of major tax provisions—could increase volatility.
Wall Street is closely watching for signs of how the Biden administration and the Trump-led Republican Congress will navigate the budget battles ahead. Any failure to agree on a long-term debt plan could increase borrowing costs and potentially lead to a downgrade of the actual credit rating, not just the outlook.
Yellen closed her remarks by calling for bipartisan cooperation to restore market confidence. “We have faced bigger challenges before and emerged stronger,” she said. “Now is the time for responsible governance, not fiscal brinkmanship.”
As the debate over tax cuts and federal debt intensifies, the future of U.S. fiscal stability could hinge on how Washington responds—not just to market warnings, but to the deep ideological divide over the role of government in the economy.
Source: Reuters
