"The downgrade of the U.S. credit rating by Moody's is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States," said Spencer Hakimian, founder of hedge fund Tolou Capital Management.

by Xinhua writer Liu Yanan

NEW YORK, May 18 (Xinhua) -- Moody's latest downgrade of U.S. sovereign credit ratings to Aa1 from Aaa is expected to intensify downward pressure on the U.S. economy, which is facing recession risks amid rising tariffs and growing inflation expectations.

Moody's cited rising government debt and interest payments for the downgrade. "This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns," it said Friday in a release.

"Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's added.

It marks the first time all three major international credit agencies -- Moody's Ratings, S&P Global Ratings and Fitch Ratings -- have rated the United States below the top tier, said James Humphries, founder and managing partner of Mindset Wealth Management LLC.

The long-term implications are clear as continued fiscal expansion without credible efforts to stabilize debt could eventually impact borrowing costs and economic flexibility, he told Reuters.

The credit rating downgrade is expected to push up U.S. Treasury bond yields and borrowing costs, with the housing market likely to feel the impact first, as fixed mortgage rates are linked to the benchmark.

"The downgrade of the U.S. credit rating by Moody's is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States," said Spencer Hakimian, founder of hedge fund Tolou Capital Management.

Moody's said if President Donald Trump's 2017 tax cuts, scheduled to expire this year, are extended by Congress, it could add around 4 trillion U.S. dollars to the U.S. fiscal deficit over the next decade.

"As a result, we expect federal deficits to widen, reaching nearly 9 percent of GDP (gross domestic product) by 2035, up from 6.4 percent in 2024," Moody's said. "We anticipate that the federal debt burden will rise to about 134 percent of GDP by 2035, compared to 98 percent in 2024."

Ed Yardeni, president of Yardeni Research, said the 10-year Treasury yield could spike as high as 5 percent as details of the tax bill get ironed out, Business Insider reported.

According to a 2016 research paper published in the Journal of Banking & Finance, a country's sovereign rating changes could affect its economic growth via "interest-rate and capital-flow channels."

"A one-notch upgrade (downgrade) causes an increase (decline) of about 0.6 percent (0.3 percent) in re-rated countries' five-year average annual growth rates," said the paper titled "The relation between sovereign credit rating revisions and economic growth."

The U.S. economy already shrank at an annual rate of 0.3 percent in the first quarter of this year, amid tariff policies that have increased uncertainty and dampened confidence.

Some research firms have lowered the likelihood of a U.S. recession in 2025 after a two-day China-U.S. high-level economic and trade meeting in Geneva eased tensions between the world's two largest economies. However, the United States still faces a significant risk of recession.

JPMorgan's chief U.S. economist Michael Feroli said, "We believe recession risks are still elevated, but now below 50 percent," down from a previous estimate of 60 percent on U.S. sweeping tariff measures announced in early April.

U.S. billionaire investor Steve Cohen said that the chance of a U.S. recession now stands at about 45 percent. "We aren't in a recession yet, but we have significant slowing growth," he said Wednesday at an investment conference in New York.

Notably, the U.S. producer price index for final demand dropped 0.5 percent in April due to waning demand for air travel and hotel accommodation.

U.S. consumer sentiment in May fell for the fifth month in a row, while one-year inflation expectations hit the highest level since 1981, according to preliminary survey results issued by the University of Michigan on Friday.

"It is the tariffs, but it's also the underlying weakness among U.S. consumers at this point and Q2 will be a weak quarter for growth, given that we came into it with poor sentiment and a lot of uncertainty around policy. And it has not been completely resolved yet, despite what we did with China last weekend," Thierry Wizman, global FX and rates strategist at Macquarie Group, was quoted by CNBC as saying.