Moody’s warns that the US government shutdown may have an effect on the economy

Moody's warns that the US government shutdown may have an effect on the economy

Rating agency Moody’s warned on Monday that a US government shutdown would hurt the nation’s credit, one month after Fitch downgraded the US by one notch as a result of a debt ceiling dispute.

A brief about Moody’s warns that the US government shutdown may have an effect on the economy

If Congress fails to provide financing for the fiscal year beginning October 1, US government functions would be disrupted and hundreds of thousands of federal employees would be placed on unpaid leave.

According to Moody’s analyst William Foster, a potential shutdown would be more proof of how the political divide in Washington is undermining fiscal decisions at a time when the affordability of US government debt is coming under increasing pressure from higher interest rates.

“If there is not an effective fiscal policy response to try to offset those pressures… then the likelihood of that having an increasingly negative impact on the credit profile will be there,” said Foster. If those pressures aren’t relieved, “that could result in a negative outlook, possibly a downgrade at some point.”

The US government is given the highest creditworthiness by Moody’s, “Aaa” with a stable outlook. It is the only major agency to keep the government’s rating at this level for the US after Fitch reduced it by one notch to AA+ in August, matching the rating given by S&P Global in 2011.

According to a statement from Moody’s, “Fiscal policymaking is less robust in the US than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness.”

Lael Brainard, the chief economic advisor to President Joe Biden, stated that Moody’s assessment emphasized the risks brought on by the legislative wrangling.

The National Economic Council’s director, Linda Brainard, said in a statement that Moody’s statement “underscores that a Republican shutdown would be reckless, create completely unnecessary risks for our economy, and lead to disruptions for communities and families across the country.”

“Congress must carry out its duties and maintain an open government.”

An official from the Treasury stated that the Moody’s study provided “further evidence that a shutdown could undercut our current economic momentum” at a time when unemployment and inflation were both below 4%.

According to Moody’s, a government shutdown would likely have a limited and transient impact on the economy, with lower government spending having the most immediate impact and the negative effects getting worse as the closure drags on.

Due to a rift within the Republican Party, Congress has thus far been unable to adopt any budget measures to finance federal agency operations in the fiscal year beginning on October 1.

Government debt payments would not be impacted by the shutdown. Early this year, political gamesmanship over the US debt ceiling put the country’s sovereign debt in danger of default.

Even while it was subsequently resolved before any missed debt payments, the situation played a significant role in Fitch’s downgrading of the company last month.

Fiscal policy’s ability to react is even more crucial in this climate of higher rates for a longer period of time and mounting pressure on debt affordability, according to Foster of Moody’s.

Because of the divisive political climate in Washington, he continued, “And it looks increasingly challenged because of things like the government shutdown and having recovered from the debt limit episode.”

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