US Government Credit Rating Downgraded to AA+ by Fitch
The US government’s credit rating has been downgraded by Fitch, one of the three major credit rating agencies, from AAA to AA+. The downgrade comes as concerns mount over the country’s finances and its increasing debt burden. Treasury Secretary Janet Yellen has described the downgrade as “arbitrary” and based on “outdated data” from 2018 to 2020.
Credit ratings are used by investors to assess the risk of lending money to a government, and the US has historically held a top rating due to the size and stability of its economy. However, this year has seen political turmoil over government borrowing, with a drawn-out battle to lift the debt ceiling, eventually reaching $31.4 trillion (£24.6 trillion) in June.
Fitch stated that the downgrade reflects its expectations of a “fiscal deterioration” over the next three years, as well as a high and growing government debt burden and an erosion of governance. Despite the bipartisan agreement to suspend the debt limit until January 2025, Fitch believes there has been a steady decline in governance standards over the past two decades.
Janet Yellen strongly disagrees with Fitch’s decision, emphasizing that Treasury securities remain a safe and liquid asset and that the American economy is fundamentally strong. The timing and rationale behind the downgrade have surprised many economists, with former Treasury Secretary Larry Summers calling it “bizarre and inept.” Mohamed El-Erian, the chief economic adviser at Allianz, described it as a “strange move” that is unlikely to have a lasting disruptive impact on the US economy and markets.
In addition to the downgrade, Fitch has also predicted that the US will slip into a mild recession later this year. However, Nobel Prize-winning economist Paul Krugman highlights the US’s success in reducing inflation without a recession as the biggest economic news of the past year.
This is not the first time the US has faced a credit rating downgrade. Standard & Poor’s previously downgraded the country’s rating from AAA to AA+ in 2011 following a similar dispute over the debt ceiling.
The Fitch announcement has faced criticism for its timing, with Jason Furman, former economic adviser to President Barack Obama, calling it “completely absurd.” The impact of the downgrade on the US economy and markets remains to be seen.
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