Fitch Ratings has lowered the credit rating of the United States government, pointing to increasing debt levels across federal, state, and local tiers, as well as a consistent decline in governance quality spanning the last twenty years.
This downgrade, issued on Tuesday, results in a one-notch reduction from AAA to AA+, although the new rating remains comfortably within the investment-grade range.
This development highlights how the expanding political polarization and recurrent disputes in Washington concerning expenditures and taxation may ultimately impose financial burdens on American taxpayers. As time passes, a diminished credit rating has the potential to elevate borrowing expenses for the U.S. government.
This marks only the second instance in the history of the nation where its credit rating has been reduced. The initial occurrence took place in 2011 when the credit rating agency Standard & Poor’s withdrew the coveted AAA rating from the U.S. due to an extended battle over the government’s borrowing ceiling.
In a report from 2012, the Government Accountability Office (GAO) approximated that the fiscal standoff in 2011 led to a $1.3 billion increase in the Treasury’s borrowing expenses for that particular year.
Simultaneously, the immense scale of the U.S. economy and the longstanding stability of the federal government have maintained its borrowing expenses at a minimal level. Global investors frequently turn to U.S. Treasury bonds in times of economic instability, consequently reducing the interest rates paid by the U.S. administration.
On May 24, Fitch had issued a cautionary note, indicating the possibility of rescinding the government’s AAA rating as Congress encountered difficulties once more in raising the borrowing ceiling. Subsequently, an agreement was struck nearly a week later that temporarily suspended the limit while also implementing approximately $1.5 trillion in deficit reduction for the government over the next ten years.
Fitch identified the deteriorating divisions within the political sphere concerning expenditure and tax strategies as a primary rationale behind its determination. The agency highlighted a decline in U.S. governance in comparison to other nations with high credit ratings, and it pointed out the recurring instances of debt limit standoffs coupled with eleventh-hour resolutions.
The actions of Fitch were met with strong criticism from officials within the Biden administration. Janet Yellen, the Treasury Secretary, labeled the decision as “arbitrary” and grounded in “outdated data.”
Yellen emphasized the rapid recuperation of the U.S. economy from the pandemic-induced recession. She pointed out that the unemployment rate had reached a nearly five-decade low, and the economy demonstrated robust growth with a 2.4% annual expansion during the April-June quarter.
Sources indicate that Fitch communicated to Biden administration officials that the insurrection on January 6, 2021, played a role in their choice to downgrade the rating, as it signaled instability within the government. A report issued by Fitch last year demonstrated a decline in government stability between 2018 and 2021, although the situation improved since President Biden assumed office. The individual sharing this information was granted anonymity due to the private nature of the discussions between the administration and the rating agency.
Another aspect contributing to Fitch’s decision is their anticipation of a “mild recession” in the last three months of this year and early next year for the U.S. economy. While economists at the Federal Reserve initially echoed a similar projection earlier this year, they reversed their stance in July, indicating an expected slowdown in growth while likely avoiding a full-fledged recession.
