Morningstar DBRS Confirms the United States of America at AAA, Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the United States of America's Long-Term Foreign and Local Currency - Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed the United States of America's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all credit ratings is Stable.

Morningstar DBRS conducts reviews of EU-endorsed sovereign ratings at least every six months, in accordance with the European Union Credit Rating Agency Regulations. This credit rating action was published following our regularly-scheduled review of the U.S. sovereign rating, which was previously updated on October 8, 2024.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that the United States' dynamic economy, strong governing institutions, and deep financial markets support the AAA rating. The U.S. economy is exceptionally large, accounting for one-quarter of global output, and highly resilient due to its diversification, flexible labor markets, and competitive private sector. The country benefits from well-established democratic institutions, a strong legal system, and transparent governance. In addition, U.S. financial markets and the U.S. dollar are at the center of world trade and capital flows, which provides the U.S. with an unusually high degree of financing flexibility.

Notwithstanding these credit strengths, two interrelated challenges could impact U.S. credit fundamentals over time. First, unless the government addresses its sizable structural deficit, public debt metrics will continue deteriorating over the medium term, potentially damaging the country's economic prospects and resilience to shocks. The federal fiscal deficit is projected to hover around 6% of GDP from 2025 to 2035, according to the Congressional Budget Office (CBO). The projection does not incorporate the potential extension of TCJA tax provisions or other potential tax cuts under discussion in Congress, which could further widen the deficit. Second, heightened political polarization may complicate efforts to implement the reforms needed to address the country's growing public finance challenges.

In addition, policy shifts by the Trump administration, particularly with regard to trade barriers and immigration, could negatively affect the growth and dynamism of the U.S. economy over the medium-term (see President Trump Doubles Down on Tariffs Without Allaying Public Uncertainty). High tariff barriers are likely to raise costs for U.S. consumers and weaken the global competitiveness of U.S. firms. A sustained increase in protectionism in the U.S., particularly if accompanied by a less welcoming environment for inward migration, could adversely impact the resilience of the U.S. economy.

CREDIT RATING DRIVERS
The credit ratings could be downgraded due to one or a combination of the following factors: (1) a failure to reduce projected fiscal deficits over the medium term, (2) a material deterioration in economic and financial resilience, or (3) a failure by Congress to lift the debt ceiling, thereby forcing the Treasury to materially delay non-debt payments.

CREDIT RATING RATIONALE
The Structural Strengths of the U.S. Economy Support the AAA Credit Ratings

Morningstar DBRS holds a positive view on the fundamental strengths of the U.S. economy. The U.S. is the largest economy in the world, highly diversified, and a global leader in innovation and research. Economy-wide productivity levels are elevated compared to other advanced economies. It is worth noting that there are few signs of economic scarring in the aftermath of the COVID-19 shock: real GDP is broadly in line with its pre-pandemic trend and the prime-age labor force participation rate is above its pre-pandemic level. Moreover, the recent strength of productivity growth bodes well for the economy's potential growth.

The U.S. economy entered 2025 with solid growth momentum. The economy expanded 2.8% annualized in the second half of 2024, supported by robust household spending. Households' debt-servicing payments as a share of disposable income is near its lowest level since 1980. The labor market is in a healthy and well-balanced position. Over the last six months, payroll gains accelerated while the unemployment rate fluctuated around 4%. Job openings have returned to pre-pandemic levels, but layoffs remain low. However, recent policy actions by the Trump administration and the associated policy uncertainty have clearly weakened the near-term outlook.

On April 2, the Trump administration announced that the U.S. will impose a 10% universal tariff on all goods imports, in addition to "reciprocal" duties that will vary by country. One key exemption is goods imports from Canada and Mexico that are USMCA-compliant. The tariffs represent a significant escalation in the U.S. administration's confrontational approach to trade. Key trading partners, such as the European Union and China, have announced plans to retaliate, which will negatively weigh on U.S. exports. Moreover, the uncertainty around tariffs itself has weakened sentiment and likely delayed consumption and investment decisions. Aggressive policing of immigration combined with threats toward key trading partners (particularly Canada) appears to be having a negative impact on travel and inbound tourism. In addition, equity markets have turned markedly lower since the April 2 tariff announcement, which, if sustained, will reduce household wealth and weigh on consumer spending. In our view, the macroeconomic impact of tariffs in 2025 will likely be slower growth and higher inflation than we anticipated at the start of the year.

Moreover, elevated and broad-based tariffs, if maintained, could weaken medium-term growth prospects. A prolonged trade shock would begin to unwind highly integrated cross-border supply chains and contribute to job losses and factory closures. The cost would likely accumulate over time, damaging investment and weakening productivity growth.

Trade Policy Clouds the Inflation Outlook and the Federal Reserve's Path for Policy Rates

Inflation continues to track above the 2% target. Headline and core CPI inflation (six-month, annualized) were both running at 3.6% in February 2025. Core PCE, the Federal Reserve's preferred inflation metric, was 3.1%. Two factors that should help moderate price pressures over the next 12 months include shelter inflation, which will likely decline as the lagged effects of a cooler housing market feed through to the index, and core services inflation (excluding shelter), which should ease amid slowing wage gains and robust productivity growth. However, the inflation outlook is clouded by U.S. tariffs. Prices on products that face tariffs will increase markedly, while, at the same time, policy actions and lingering policy uncertainty could weaken growth prospects and dampen economy-wide price pressures.

With inflation still running above target, and the economy facing a trade shock of unknown size and duration, Morningstar DBRS expects the Federal Reserve to keep its easing cycle on pause until there is greater visibility on tariffs and their impact on prices, activity, and inflation expectations. The Federal Reserve initiated an easing cycle in September 2024 and cut the federal funds rate by 100 basis points through December 2024. This took the policy rate to 4.25%-4.5%. The Fed left the rate unchanged in its January and March Federal Open Market Committee meetings. According to Feds Funds futures, the market expects the Fed to lower the policy rate by 75-100 basis points by December 2025, thereby leaving policy settings somewhat restrictive throughout the year. In Morningstar DBRS' assessment, the Fed's actions over the last 3 years have guided inflation back to the target and reinforced its inflation-fighting credibility. As of last week, the 5 Year, 5 Year Forward breakeven inflation rate was 2.1%.

The rapid rise in interest rates in 2022 and 2023 put stress on some parts of the financial system, but banks as a whole navigated the market turbulence relatively well. Declining commercial real estate valuations, particularly office space, led to sizable losses and will likely continue to weigh on the financial performance of some banks and non-bank financial institutions. Lower-income households also came increasingly under financial stress, which contributed to higher delinquencies on consumer loans and credit cards last year. However, broader trends point to strong capital levels and stabilizing asset quality. Commercial banks posted Tier 1 capital at 14.3% of risk-weighted assets in Q4 2024, which is above prepandemic levels and well above levels prior to the global financial crisis.

External Accounts Reflect Dollar Strength and Safe Haven Flows

The U.S. current account deficit has widened since the pandemic amid strong domestic demand. From 2019 to 2022, the current account deficit increased from 2.1% of GDP to 3.9%. Most of the deterioration stemmed from strong import growth as the U.S. economy rapidly recovered from the pandemic and consumption patterns shifted toward tradable goods. In addition, primary income payments (returns on U.S. assets held by foreigners) recovered more quickly than primary income receipts (driven by returns on foreign assets) and remittance payments abroad increased markedly. As growth shifted into a lower gear, import demand weakened and the current account deficit narrowed, reaching 3.3% of GDP in 2023. The current account deficit is expected to remain around 3% in 2025 and 2026. We do not anticipate that the announced tariffs, in and of themselves, will have a meaningful impact on the outlook for the current account.

The net international liability position of the U.S. has increased over the last two years. International liabilities have increased more than international assets, largely due to large direct investments and outsized gains in American equity markets relative to foreign equity markets. The strength of the U.S. dollar has also played a role. Morningstar DBRS views U.S. external accounts as benefiting from the unique role and position of the U.S. dollar within international finance. This limits risks and lends support to the Balance of Payments building block assessment.

The Absence of a Strategy To Put Fiscal Accounts on a Sustainable Path Could Weaken U.S. Creditworthiness Over the Medium Term

The medium-term fiscal outlook is a source of concern. The CBO projects the federal deficit to hover around 5-6% of GDP from 2025 to 2035. Given the cyclical position of the economy, the deficit reflects a structural imbalance. In addition, risks to the deficit outlook are skewed to the upside, in Morningstar DBRS' view. Fiscal results would deteriorate relative to baseline projections if part or all of the 2017 tax cuts that expire next year are extended, growth in defense spending outpaces expectations, or interest costs are higher than anticipated. In February 2025, Republicans in the House of Representatives passed a budget resolution for fiscal year 2025 that calls for $4.5 trillion in tax cuts and $1.7 trillion in net spending cuts over the next decade, thereby allowing up to $2.8 trillion in primary deficit increases from 2025-2034. Including added interest, the House resolution would increase the projected fiscal deficit by about 1.0% of GDP per year. The budget resolution lays out a roadmap for tax and spending legislation under reconciliation, but it does not give specific changes. Given the need to reach an agreement across the Senate and House, where Republicans hold a very thin majority, Morningstar DBRS believes there is still significant uncertainty around the overall cost and composition of potential tax and spending changes.

Federal debt held by the public is expected to rise from 98% of GDP in 2024 to 109% in 2030 and 118% in 2035. Rising debt and higher interest rates are putting a greater burden on the budget. Net interest payments increased from 1.5% of GDP in 2021 to 3.1% in 2024, above the 40-year average (1984-2023) of 2.1% of GDP and approaching the historical high of 3.2% (1991). If policymakers are unwilling or unable to address the government's sizable and growing fiscal imbalance, public debt metrics will continue to deteriorate over the medium term, potentially weakening the country's growth prospects and resilience to shocks.

The U.S. Maintains a High Degree of Financing Flexibility

Despite poor fiscal outcomes at the federal level, the U.S. retains an unusually high degree of flexibility in financing its debt. The resilience of the U.S. Treasury market, which is supported by the use of the dollar as the world's primary reserve currency, lends support to the Debt & Liquidity building block assessment. Demand for Treasury securities is consistently strong, coming from a wide range of banks, official sector buyers, and other investors in need of highly liquid assets. In spite of a sizable increase in nominal U.S. dollar debt issuance, official holdings at the end of 2024 still accounted for nearly one-third of outstanding debt held by the public. The durable funding advantage provides the U.S. government with a higher capacity to finance debt and to carry a relatively high debt burden without harming growth prospects. The status of the U.S. dollar as the world's primary reserve currency is a key feature of the U.S. credit profile. Although highly unlikely, policy actions that significantly weaken the dominance of the U.S. dollar in global markets would be viewed as credit negative.

Political Polarization Could Make It More Difficult to Address Key Credit Challenges

The U.S. benefits from effective checks and balances, strong rule of law, and high levels of openness and transparency. This provides a high degree of public accountability and strong incentives for sound governance. Changes to federal law, including the budget, must be approved by three separate bodies: the House, the Senate and the Presidency, which respond to different constituencies and are frequently controlled by different parties. As a result, legislative negotiations are often challenging, and delays are in large part a feature of the United States' pluralistic and competitive presidential system. Similarly, the judicial process can also delay or create a significant check on executive or legislative reforms.

President Donald Trump defeated Vice President Kamala Harris on November 5th to win the presidency, while the GOP took control of the Senate and maintained control of the House. With majorities in both chambers, President Trump and the GOP are in a good position to advance Republican legislative priorities. However, the composition of Congress still acts as a constraint on Republican policymaking. Senate Republicans are short of the 60-seat threshold needed to overcome the filibuster, and the Republicans' slim majority in both chambers complicates their ability to pass legislation.

Increased polarization is a challenge. With low levels of trust between the two main parties and a deeply divided electorate, polarization appears to have weakened centrist politics and strengthened extreme posturing. Both parties have displayed an unwillingness to compromise due to the diverging priorities of their respective base. The highly polarized political environment appears to be a growing impediment to Congress enacting reforms needed to address the country's key credit challenges.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (August 13, 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://dbrs.morningstar.com/research/451560.

Notes:
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at:
https://dbrs.morningstar.com/about/methodologies.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

The primary sources of information used for this credit rating include the U.S. Department of Treasury, Federal Reserve Board, Federal Reserve Bank of St. Louis, Congressional Budget Office, Office of Management and Budget, Bureau of Economic Analysis, Bureau of Labor Statistics, Bank for International Settlements, International Monetary Fund, World Bank, S&P Corelogic, and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to our Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of our website.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on October 8, 2024.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Michael Heydt, Senior Vice President, Sector Lead - Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director - Global Sovereign Ratings
Initial Rating Date: September 8, 2011

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