Fitch Ratings has downgraded the United States government’s credit rating from AAA to AA+ due to increasing debt levels and a “steady deterioration in standards of governance” over the past two decades. While the new rating still falls into the investment grade category, it reflects the consequences of political polarization and repeated standoffs over spending and taxes in Washington.
This is only the second time in history that the nation’s credit rating has been downgraded. The first downgrade occurred in 2011 when the U.S. government engaged in a prolonged battle over the borrowing limit. The lower credit rating could potentially raise borrowing costs for the government over time.
Despite the downgrade, the U.S. economy’s size and the stability of the federal government have helped keep borrowing costs low. During periods of economic turmoil, global investors tend to flock to U.S. Treasury securities, which in turn lowers the interest rate paid by the government.
Fitch had issued a warning on May 24 regarding the potential downgrade if Congress struggled to raise the borrowing limit. A deal was eventually reached, suspending the limit and cutting $1.5 trillion from the government deficit over the next decade. However, the worsening political divisions around spending and tax policy were cited as key reasons for Fitch’s decision.
The Biden administration officials strongly criticized Fitch’s move, with Treasury Secretary Janet Yellen calling it arbitrary and based on outdated data. Yellen highlighted the rapid economic recovery from the pandemic recession and the strong growth rate seen in the April-June quarter. However, Fitch informed the administration that the January 6, 2021 insurrection was a factor in its decision, as it indicated government instability.
Fitch also predicts a “mild recession” in the final months of this year and early next year, further contributing to its downgrade. It is worth noting that economists at the Federal Reserve initially made a similar forecast but later reversed it, stating that while growth would slow down, a recession would likely be avoided.
Overall, Fitch’s decision to lower the U.S. credit rating reflects the negative impact of growing debt and political strife on the country’s fiscal standing. It serves as a reminder of the importance of addressing these issues to maintain a strong and stable economy.
• Associated Press Writers Josh Boak and Seung Min Kim contributed to this report.
Unique Perspective: The downgrade of the U.S. credit rating by Fitch emphasizes the need for the government to address rising debt and political divisions. It serves as a wake-up call for policymakers to find bipartisan solutions to curb spending and ensure long-term fiscal stability. Failure to do so could lead to higher borrowing costs and potentially jeopardize the country’s economic growth. It is crucial for the United States to regain its AAA rating and restore confidence in its financial system.
