In a significant move, credit rating agency Fitch has downgraded the United States’ credit rating to AA+, expressing concerns over its surging debt and a perceived decline in governance standards. This downgrade, which signals potential risks associated with investing in the nation’s debt, may lead to higher borrowing costs for the US government in the long run.
The rating revision comes after months of contentious negotiations between Democrats and Republicans over taxes and spending, culminating in a last-minute agreement in June to raise the $31.4 trillion borrowing limit and avoid a debt default. However, Fitch cited the increasing polarization surrounding spending and tax policy, which has resulted in recurring debt limit standoffs and eleventh-hour resolutions, as a central reason for the downgrade.
The credit agency underscored its concerns about the nation’s fiscal outlook over the next three years, noting a mounting general government debt burden and an erosion of governance standards. Despite a bipartisan agreement in June to suspend the debt limit until January 2025, Fitch emphasized a steady decline in governance, particularly regarding fiscal and debt matters, over the past two decades.
Additionally, Fitch raised red flags over the lack of a “medium-term fiscal framework” in Washington and limited progress in addressing challenges arising from rising social security and Medicare costs due to the aging population.
Moreover, The Associated Press reported that Fitch mentioned the January 6, 2021 riot at the Capitol as a factor in the downgrade, further illustrating the weight of political unrest on the nation’s financial standing.
This rating cut marks only the second time in history that the US has experienced such a downgrade, with the first occurring in 2011 when Standard & Poor’s stripped the country of its AAA rating during a protracted debt ceiling standoff.
The Biden administration strongly pushed back against Fitch’s decision, with Treasury Secretary Janet Yellen deeming it “arbitrary” and based on outdated information. Yellen highlighted improvements made during this administration, including bipartisan legislation addressing the debt limit and investments in infrastructure, asserting that Treasury securities remain a preeminent safe and liquid asset worldwide and emphasizing the fundamental strength of the American economy.
In response to the downgrade, White House Press Secretary Karine Jean-Pierre criticized Fitch’s decision as “defying reality,” citing the US’s robust economic recovery compared to other major economies worldwide. Jean-Pierre also accused Republicans of posing a threat to the economy.
As the dust settles, the nation will grapple with the ramifications of this credit rating cut and its potential implications for financial markets, investors, and policymakers alike. While Treasury securities remain a cornerstone of global finance, the need for improved governance and fiscal prudence looms large on the path to maintaining financial stability and investor confidence in the United States.
