The prospect of rising U.S. interest rates in the years ahead will not result in changes to the sovereign ratings for the U.S. government, or the rating outlook, according to a new report from Moody’s Investors Service.
Following the U.S. Federal Reserve’s recent decision to end its current bond buying program, Moody’s says that it expects rates to begin rising next year. “We think the Fed will start raising the fed funds rate around mid-2015. The when and the how-much remain up in the air, but the rise will be gradual,” says Steven Hess, a Moody’s senior vice president.
“The extent of any hike will depend on how well the Fed thinks the economy and financial markets can weather the increases. The hike could be smaller than currently projected if inflation remains subdued and economic growth is lower than what the Fed expects,” Hess says.
However, in either case, the rating agency doesn’t expect that rate hiking activity to alter the credit outlook for the U.S. sovereign rating. “Regardless, our outlook and ratings on the U.S. government already incorporate the prospects of rising interest rates, so at this point we are making no changes to either,” reports Hess.
Moody’s says that it ran two alternative scenarios: a low-rate scenario that assumes a rise to 4.3%-4.5% by the end of 2019, and a high-rate scenario that assumes a rise to 5.3%-5.5%. And, it reports that a higher than expected rate hike would only push up budget deficits and debt ratios modestly. “The deficit is likely to remain at around the current figure of less than 3% for several years,” says Hess.
In addition, Moody’s say U.S. government debt will remain affordable. “Because of the status of the U.S. dollar and Treasury bonds as reserve currency assets, interest rates and borrowing costs are unlikely to rise significantly higher than the levels the [Congressional Budget Office] has already factored into its budget deficit projections,” it says.