The loss of the United States’ last pristine credit rating made headlines. But the real story, as veteran economist and global strategist Dr Komal Sri-Kumar sees it, is what happened next: business as usual.
On May 16, Moody’s downgraded the US sovereign credit rating from Aaa to Aa1, citing surging debt and interest burdens that now outpace those of similarly rated countries. It was the third and final domino to fall. S&P acted in 2011. Fitch followed in 2023. Moody’s simply confirmed what many had long accepted: America’s balance sheet no longer matches its reputation.
This wasn’t a surprise, Sri-Kumar points out. For the first time, interest payments on federal debt have surpassed defence spending, hitting a $1.1 trillion annual run rate. “The lower rating,” he explains, “is supposed to encourage greater discipline in the budgeting process, with governments hoping to eventually restore their credit standing.” That is the theory.
The practice? Something else entirely.
Just days after the downgrade, the House narrowly passed what Trump called his “big, beautiful bill.” The legislation extends the 2017 tax cuts, eliminates taxes on tips, and boosts spending on both border security and defence. The price tag: an estimated $3 trillion increase to the deficit over the next decade.
Markets responded swiftly. The yield on 30-year Treasuries surged to 5.15%—its highest level since 2007—as investors digested the prospect of rising issuance and looser fiscal policy. The question, Sri-Kumar asks, is whether bondholders are being too lenient. Could the White House’s optimism on tariffs and trade deals really offset the cost of expanding tax cuts?
Kevin Hassett, Director of the National Economic Council, certainly thinks so. On Fox Business, he predicted a “liftoff” for the US economy in the second half of the year, with growth “way north” of 3%, potentially even 4%. Treasury Secretary Scott Bessent echoed the bullish tone, hinting that multiple trade deals were on the horizon. Trump’s threat of a 50% tariff on EU goods? Pure negotiation theatre, Bessent claimed.
But even before the cameras cooled, the script unraveled. Trump contradicted his own Treasury Secretary, declaring that the tariff wasn’t a bluff. “Not looking for a deal,” he stated flatly. And just like that, the administration’s fiscal projections were once again hanging on a moving target.
This isn’t new, Sri-Kumar observes. “Frequent shifts in US trade policy combined with repeated climb downs from tough stances have made foreign counterparts play for time.” The pattern is familiar: aggressive posturing, market turbulence, and eventual retreat when recession risk or bond yields climb too high.
The result? Policy paralysis. Uncertainty. And chaos for global firms trying to navigate what used to be a stable trading partner. Consider Apple, Sri-Kumar notes. The company shifted production to India to avoid China tariffs, only to now face a new threat: a proposed 25% tariff on Indian-made iPhones. “American manufacturers lack clarity on US trade policy,” he writes, and the damage to supply chains is already materialising.
So where does this leave monetary policy?
The Federal Reserve has been using tariff ambiguity as a reason to hold rates steady. Chairman Jerome Powell and others have argued that further cuts are off the table until the dust settles. Chicago Fed President Austan Goolsbee repeated that rationale on CNBC. But Sri-Kumar isn’t buying it. “If he is really so concerned about tariff uncertainty,” he asks, “does it not behoove him… to vote to raise the Federal Funds rate at the next meeting on June 17–18?”
He doesn’t expect it to happen. “I do not really expect such courage or political independence on the part of the Federal Reserve,” he concludes.
The downgrade may have been inevitable. The reaction, however, speaks volumes. Instead of belt-tightening or a return to sound policy, the US is digging in—deeper into debt, deeper into political short-termism, and deeper into the illusion that ratings don’t matter until they do.
Markets may be tolerating it for now. But as Sri-Kumar warns, when trade policy zigzags and fiscal restraint becomes a slogan rather than a stance, the cost of pretending begins to show—in higher yields, in slower growth, and in the quiet erosion of trust.
This article quotes views expressed by Dr Komal Sri-Kumar in his weekly commentary. These are his personal opinions and not financial advice. Always consult a qualified adviser before making investment decisions.
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