Moody’s Investors Service said the U.S. credit rating may be downgraded for the first time on concern that fiscal discipline may erode, further debt reduction measures won’t be adopted and the economy may weaken.

The U.S., rated Aaa since 1917, was placed on negative outlook, Moody’s said in a statement today as it confirmed the rating after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending. A decision on the rating may be made within two years, or “considerably sooner,” according to Moody’s Steven Hess.

The debt-limit compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Hess, senior credit officer at Moody’s in New York, said in a telephone interview. “We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward.”

A ratings cut would raise the specter that the wrangling between Obama and Republican lawmakers over spending cuts and taxes will harm American prestige and the global financial system. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It could also hurt the rest of the U.S. economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries.

Fitch Outlook

“A downgrade is a sign that Congress is failing to address a real fiscal issue,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview before the announcement.

Moody’s put the U.S. under review for a downgrade on July 13 for the first time since 1996.

Fitch Ratings said today the U.S. is under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating. Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt.

An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Federal Reserve research and data.

Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.

Automatic Triggers

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Aug. 1.

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S&P had indicated that anything less than $4 trillion in cuts would jeopardize the U.S.’s AAA rating.

“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” Moody’s said in the statement. Moody’s said its baseline scenario assumes that fiscal discipline is maintained in 2012.

“Further measures will likely be required to ensure that the long-run fiscal trajectory remains compatible with a Aaa rating,” Moody’s said. The credit rater expects a stabilization of the federal government’s debt-to-gross domestic product ratio not too far above its projected 2012 level of 73 percent by the middle of the decade, followed by a decline.

Recent downward revisions of economic growth rates and the very low growth rate recorded in the first half of 2011 call into question the strength of potential growth in the next year or two, Moody’s said.

Yields Decline

U.S. bonds and the dollar have signaled increased demand for the assets of the world’s largest economy even as the prospects of losing the AAA rating rose as the debt talks extended to the deadline when the Treasury said it would exhaust its ability to borrow.

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

‘Safe Haven’

Treasury 10-year yields fell to as low as 2.60 percent on today in New York, the least since November. The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

“Regardless of the rating, Treasuries are going to be seen as the safe haven,” said Matthew Freund, a senior vice president at USAA Investment Management Co. in San Antonio, where he helps oversee about $50 billion in mutual fund assets. “The U.S. remains one of the strongest, most dynamic economies in the world.”

To contact the reporter on this story: John Detrixhe in New York at

To contact the editor responsible for this story: Dave Liedtka at

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