Fitch Ratings, a renowned credit rating agency, has taken the decision to downgrade the credit rating of the United States government, citing alarming concerns regarding the escalating debt levels at the federal, state, and local levels, and a notable “steady deterioration in standards of governance” over the past two decades. While the sheer size of the US economy and its historically stable federal government have enabled it to maintain low borrowing costs, the recent political landscape and financial challenges have prompted Fitch to take this significant step. The downgrade comes at a time when global investors typically seek refuge in US Treasury securities during periods of economic turmoil, which tends to lower the interest rate paid by the US government.
Fitch had previously issued warnings about the potential removal of the government’s triple-A rating as Congress struggled to raise the borrowing limit. However, after a week of negotiations, a deal was reached to suspend the limit and cut approximately USD 1.5 trillion from the government deficit over the next decade. A key reason cited by Fitch for the downgrade is the worsening political divisions around spending and tax policy. The agency expressed concern over repeated debt limit standoffs and last-minute resolutions, which have contributed to the erosion of US governance relative to other highly rated countries.
The Biden administration officials strongly criticized Fitch’s move, with Treasury Secretary Janet Yellen deeming it “arbitrary” and “based on outdated data.” Yellen pointed out the rapid economic recovery from the pandemic recession, with unemployment rates nearing a half-century low and the economy expanding at a solid 2.4% annual rate in the April-June quarter. Surprisingly, Fitch revealed that the January 6, 2021 insurrection was also a factor in its decision to downgrade the US government’s credit rating, indicating concerns over the stability of the government. However, they did acknowledge an improvement in government stability since President Biden assumed office.
Another critical factor influencing Fitch’s decision is their expectation of the US economy tumbling into a “mild recession” in the final three months of this year and early next year. This prediction aligns with a similar forecast made by economists at the Federal Reserve in the spring, though the Fed has since reversed its stance and now anticipates a slowdown in growth while avoiding a full-blown recession. As the US government faces these challenges and endeavors to stabilize its governance and economy, global investors will closely monitor the implications of the credit rating downgrade and its potential impact on US Treasury securities.