By Eiko Sievert, Executive Director, Sovereign and Public Sector

This reflects one of the main negative drivers for the downgrade of the US sovereign rating to AA- in October last year.

The criminal probe into Fed Chairman Jay Powell further intensifies the growing political and legal pressure from the executive branch on the independence and credibility of a key pillar of US governance. The growing political scrutiny, including the attempted dismissal of Governor Lisa Cook last year, will pose a significant challenge for the Fed’s next chair to operate with the traditional degree of independence that markets have been accustomed to.

The broad weakening of governance standards in the US increases the risk of policy missteps, including by the Federal Reserve. With the central bank’s dual mandate, ongoing political pressure from the administration to lower interest rates despite resilient growth, low unemployment (4.4% as of December 2025), sticky inflation and loose financial conditions, raises the risk of the Federal Reserve continuing to miss its 2% target over coming years.

While a higher inflation rate may support the country’s debt repayment capacity, it also raises the likelihood of higher risk premiums over the medium-term, exacerbating public finance vulnerabilities. We expect the general government debt ratio for the US to reach 140% of GDP by 2030, up from 122% in 2024. Among advanced economies, this would place the US as the second most highly indebted sovereign after Japan (A/Stable), and above forecasted debt levels by 2030 in the UK (AA/Stable) at 115%, France (AA-/Negative) at 125% and Italy (BBB+/Positive) at 136%.

Increasingly ineffective Congress points to governance slippage, political polarisation

Overall, the broad weakening in governance standards has also deepened long-standing political polarisation contributing to an increasingly ineffective Congress. This is reflected in frequent legislative gridlocks and the recent government shutdown underscoring the widening ideological divide. In this environment, bipartisan compromise to address the country’s structural fiscal challenges appears increasingly unlikely.

Congressional polarisation also matters in the context of the recurring debt ceiling crises. Under the One Big Beautiful Bill Act, the debt ceiling was raised by USD 5tn to USD 41.1tn, a general government debt level, which is set to be exceeded by 2027. This makes the results of the November 2026 midterms a key determinant of whether a renewed political stand-off and the associated risk of a near or technical default emerges.