The United States long-term credit rating was downgraded by Fitch Ratings, citing the nation’s high and growing debt burden and political brinkmanship over borrowing authority as reasons for eroding confidence in its fiscal management.
Fitch lowered the U.S. long-term rating from AAA to AA+. This downgrade is the second in America’s history and follows the near-default on debt payments that occurred two months ago. Negotiations were held to determine whether the United States, which reached its borrowing limit on January 19th, should be allowed to borrow more to pay its bills. Congress reached an agreement in May to suspend the debt ceiling, allowing the United States to continue borrowing.
Despite the agreement, a government shutdown is still possible this fall as lawmakers debate federal spending. Fitch cited the ongoing conflicts over federal spending as a major factor in the decision to downgrade America’s debt.
Fitch also highlighted the increasing U.S. debt levels resulting from tax cuts and spending initiatives. The firm noted that the U.S. has made limited progress in addressing the rising costs of programs like Social Security and Medicare, which are expected to significantly increase as the population ages.
The downgrade by Fitch might limit the number of investors able to buy U.S. government debt, as some investors have constraints on the quality of debt they can purchase. Investors requiring a perfect credit rating across the three major agencies will now have to look elsewhere to fulfill investment mandates.
However, the impact is not expected to be severe due to the size of the Treasury market and the ongoing demand for U.S. Treasury securities.
The Biden administration strongly disagreed with Fitch’s decision, criticizing its methodology and stating that the downgrade does not reflect the health of the U.S. economy. Treasury Secretary Janet L. Yellen asserted that U.S. Treasury securities remain the world’s leading safe and liquid asset and emphasized the strength of the American economy.
The Biden administration officials, speaking anonymously, revealed that they had expressed their disagreements with Fitch prior to the downgrade. Fitch had repeatedly raised concerns about U.S. governance, particularly regarding the January 6, 2021, insurrection.
On the same day as the downgrade, former President Donald J. Trump was indicted for his efforts to overturn the 2020 election, which fueled the January 6th riot.
Senator Chuck Schumer of New York, the majority leader, blamed the Fitch downgrade on Republicans who refused to raise America’s borrowing limit without significant concessions. He urged Republicans to stop using the debt limit as leverage for political gain.
The debt limit agreement reached in June aims to cut federal spending by $1.5 trillion over a decade, including freezing some funding and capping spending growth. Despite these measures, the national debt, currently over $32 trillion, is expected to exceed $50 trillion by the end of the decade.
It is unlikely that Fitch’s downgrade will lead to drastic changes in the United States’ fiscal trajectory.
Henrietta Treyz, director of macroeconomic policy research at Veda Partners, expects Congress to criticize Fitch rather than enact deficit reduction, tax increases, military spending reductions, entitlement reform, or changes to appropriations bills.
