The Fitch rating agency took the United States’ top-notch credit rating by a step on Tuesday, citing a growing federal debt burden and an “erosion of governance” manifested in repeated debt limit standoffs. The agency’s decision to cut the nation’s credit rating from AAA to AA+ sparked a fiery rebuttal from the White House, with press secretary Karine Jean-Pierre saying the move “defies reality.”
In a statement, the rating agency said it was downgrading the U.S. because of an expected fiscal deterioration over the next three years and the country’s growing debt burden. It also cited political partisanship that has hampered negotiations to reach a debt ceiling resolution — even after President Joe Biden and Speaker Kevin McCarthy reached a deal in late May to avert a catastrophic default. In addition, the agency said it was concerned about a lack of medium-term fiscal policy and budgeting clarity, as well as the Federal Reserve’s tightening cycle and the difficulty of finding funding for Social Security and Medicare on a long-term basis.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets—generally, a lower credit rating results in higher borrowing costs. The yield on the 10-year Treasury note fell slightly, and the cost of insuring federal debt against default remained steady.
A downgrade could prompt investors to seek safer investments and shift money from equities into government bonds, potentially weighing on stocks and causing global financial markets to become more volatile. The move also could push up the cost of borrowing for the federal government, which would directly impact average Americans’ pocketbooks.
The rating agency warned that a downgrade could trigger an “intense political debate” in Washington over fiscal policy, as congressional Republicans and Democrats battle over proposals to rein in the deficit while the president seeks re-election. Fitch also warned that the political impasse could halt progress toward reducing the nation’s $31 trillion debt load.
Ultimately, the decision was widely viewed as a disappointment for President Biden and the administration, which had worked hard to improve the U.S. financial picture. Fitch’s chief credit officer for the US, Paul Ciocoiu, called the downgrade a “setback” and added that the U.S. economy remains among the world’s most vital. The decision drew scorn from former Treasury Secretary Larry Summers, who called it “bizarre and inept,” mainly as the economy looks more robust than expected. He criticized the move in a post on the X app, formerly known as Twitter.