U.S. Treasury Secretary Janet Yellen has dismissed Moody’s recent downgrade of the U.S. credit outlook, calling the move overly pessimistic and politically premature, as the Biden and Trump camps clash over the fiscal implications of reinstating Trump-era tax cuts.
The ratings agency revised its outlook on U.S. sovereign credit from “stable” to “negative,” citing the country’s growing fiscal deficit, political gridlock, and the uncertainty surrounding future budgetary policy—especially in light of renewed Republican efforts to make Trump’s 2017 tax cuts permanent. Though Moody’s did not downgrade the U.S.’s AAA credit rating, the warning sent ripples through Washington.
Yellen, speaking at a financial policy forum in San Francisco, defended the country’s economic resilience and blasted the downgrade. “The fundamentals of the U.S. economy remain strong. Our debt is sustainable, and our institutions remain among the most credible in the world,” she said. “What we are seeing is more of a political reaction than an economic one.”
At the heart of the controversy is the push by Republicans in Congress—backed by former President Donald Trump—to extend and expand the 2017 Tax Cuts and Jobs Act, which lowered corporate taxes and reduced individual income tax rates. The law’s provisions are set to expire in 2026 unless Congress acts. The renewed tax cut campaign is a cornerstone of Trump’s economic agenda in his second term.
Supporters argue the cuts will stimulate growth, boost small businesses, and reinforce the post-pandemic recovery. Critics, including many Democrats, say the move will balloon the deficit and further strain public services. According to the Congressional Budget Office, making the tax cuts permanent could add more than $3 trillion to the national debt over the next decade.
Moody’s cited this fiscal uncertainty as a major reason for its downgrade of the outlook. “Without a clear, long-term plan for deficit reduction or structural reform, risks to U.S. debt affordability will continue to rise,” the agency stated.
Yellen countered that any debate over taxes and spending must be part of a comprehensive strategy—not used to justify alarmism. “We are in discussions with Congress on a path forward. But let’s be clear: downgrades based on hypothetical political scenarios do not help financial stability,” she said.
The White House has voiced opposition to extending the Trump tax cuts without adjustments to make them more equitable and fiscally responsible. President Biden’s administration favors targeted tax relief for working families while raising corporate and wealth taxes to offset budget impacts.
Markets have largely brushed off the Moody’s decision. Treasury yields and the U.S. dollar remained stable, indicating investor confidence in the long-term strength of the American economy. However, financial analysts warn that sustained gridlock in Washington could eventually erode trust and increase borrowing costs.
Republicans have seized on the downgrade to press their case for reduced government spending. House Speaker Mike Johnson said the news “underscores the urgent need to rein in wasteful spending and restore fiscal discipline.”
As budget negotiations intensify ahead of the 2026 fiscal deadline, the political divide over how to manage the nation’s debt and tax structure remains as wide as ever. Yellen urged lawmakers on both sides to avoid using credit ratings as political weapons. “We should be focused on solutions, not scare tactics,” she said.
While the Moody’s downgrade does not immediately affect U.S. borrowing costs or legal obligations, it has reignited debate about the nation’s fiscal direction. Whether the renewed Trump tax agenda will gain full traction in Congress remains uncertain—but it is already shaping the economic and political discourse heading into the 2026 election cycle.
Source: Reuters
