Trump's tariff and tax proposals could weaken government finances, analysts say
Moody’s is forecasting that the Federal Reserve will lower its key interest rate by about half a percentage point by the end of the year, even as it sounds the alarm on the long-term health of US government finances.
In a report released Tuesday, the credit rating agency said it expects the federal funds rate to settle between 3.75% and 4% by year-end, down from the current range of 4.25% to 4.5%. That aligns with the Fed’s own projections for two quarter-point cuts in 2025, offering some potential relief for borrowers and mortgage professionals watching rates closely.
But Moody’s broader message was far less upbeat. The agency issued a warning about the trajectory of US fiscal strength, citing president Donald Trump’s proposed trade tariffs and tax cuts as key risks to government revenues and debt affordability.
“The potential negative credit impact of sustained high tariffs, unfunded tax cuts and significant tail risks to the economy have diminished prospects that these formidable strengths will continue to offset widening fiscal deficits and declining debt affordability,” Moody’s said.
The agency first gave the US a negative credit outlook in November 2023. Since then, the situation has worsened. According to Moody’s, America’s “fiscal strength is on course for a continued multiyear decline,” and that trend will likely continue even if the economy performs well.
Read next: Fed tones down inflation fears, keeps mortgage market tight
The warning comes as lawmakers and the Trump administration clash over how to address rising deficits and a ballooning debt load. The federal budget deficit reached $1.8 trillion for the fiscal year ending September 30, an 8% increase from the prior year.
Moody’s acknowledged the resilience of the US economy and its global role as an anchor, noting the strength of the dollar and the Treasury market. But analysts also pointed out that the country’s “debt affordability remains materially weaker than for other AAA-rated and highly rated sovereigns.”
That raises concerns about demand for Treasuries, a key issue for long-term interest rates and overall borrowing costs. Major bond investors like Pimco have already flagged concerns about “sustainability,” expressing reluctance to buy long-dated US debt.
“Fiscal weakening will likely persist even in very favourable economic and financial scenarios,” Moody’s said.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
