The United States had its credit downgraded by Fitch Ratings from AAA to AA+ on Tuesday, two months after Congress and the White House narrowly avoided the country defaulting on its debt obligations.
The credit downgrade has not spooked investors as much as previous downgrades, but the move has dampened the outlook on the economy and affected the odds of a recession. Here is everything to know about the rating change.
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What happened?
Fitch Ratings, one of the largest credit rating agencies, downgraded the United States’s credit rating on Tuesday, more than two months after putting it on a “negative watch” in the midst of debt ceiling negotiations, which went to the last minute but were ultimately resolved.
The rating change moved U.S. debt off the “negative watch,” and it is now considered “stable.”
The move by Fitch marked the first downgrade of U.S. debt by any agency since Standard & Poor’s downgraded the U.S. from AAA to AA+ in 2011.
What reason did Fitch offer for the downgrade?
Fitch said it downgraded the debt rating due to a “steady deterioration in standards of governance over the last 20 years.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade,” Fitch said in a statement.
The credit rating agency also warned that “tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession in 4Q23 and 1Q24,” according to Fitch projections.
What was the White House’s reaction?
The White House was not pleased with the credit downgrade, saying in a statement that it “strongly” disagrees with Fitch’s assessment of the U.S. debt outlook and placing blame for recent troubles on the Trump administration.
“We strongly disagree with this decision. The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” White House press secretary Karine Jean-Pierre said in a statement on Tuesday.
“And it’s clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy,” the statement continued.
The rating downgrade comes as the White House is attempting to tout “Bidenomics.”
Is U.S. debt risky?
The rating downgrade to AA+ indicates that Fitch still believes U.S. debt is at “very low risk” of default, with the rating of AA indicating a “very high credit quality” as opposed to the “highest credit quality” of a AAA rating.
Investors do not appear spooked at all, with some criticizing the credit downgrade. Despite the downgrade, the U.S. 10-year Treasury and U.S. dollar index have remained steady in recent years.
Despite a dip in the markets on Wednesday, investors do not appear as negative as in 2011 when S&P downgraded U.S. debt. In 2011, stocks tanked following news of the credit downgrade. The Dow Jones Industrial Average was trading down more than 200 points Wednesday midday but was still up more than 900 points in the past month overall.
Could the downgrade force investors to sell treasuries?
It appears unlikely that the downgrade will force investors to sell treasuries, as despite many funds being required to hold onto AAA-rated securities, major holders are unlikely to have requirements to dump treasuries based on credit ratings.
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“The downgrade should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change,” Alec Phillip, chief political economist for Goldman Sachs, said in a report Tuesday.
The downgrade to the U.S. debt rating comes ahead of an impending battle between Republicans and Democrats over the fiscal 2024 budget that is set to play out in the halls of Congress next month. If not resolved before the end of the fiscal year, the budget fight could lead to a government shutdown.
