In a surprising move, Fitch Ratings downgrades the United States' credit rating from 'AAA' to 'AA+', citing fiscal concerns and governance issues, raising alarm in the financial world.
"I strongly disagree with Fitch Ratings’ decision," said Secretary of the Treasury Janet Yellen. "The change by Fitch Ratings announced today is arbitrary and based on outdated data. Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision."
Fitch Ratings downgraded the United States' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA'. This downgrade comes as a significant blow to the U.S. economy, which has long been regarded as a safe haven for investors and borrowers alike.
The decision by Fitch has sparked heated responses from top U.S. officials, including Yellen, and the White House itself. Yellen vehemently disagreed with Fitch's judgment, citing the use of outdated data and arbitrary decision-making in their assessment.
"Many of these measures, including those related to governance, have shown improvement over the course of this Administration," Secretary Yellen argued, pointing to the progress made under the Biden presidency. She highlighted the passage of bipartisan legislation to address the debt limit, investments in infrastructure, and other measures that aimed to enhance America's competitiveness.
The White House echoed Yellen's sentiments, expressing strong disagreement with Fitch's decision. They emphasized the significant economic recovery achieved under President Biden's leadership, boasting the strongest recovery among major economies worldwide.
"Fitch's decision does not change what Americans, investors, and people all around the world already know," Yellen said, reaffirming the prominence of Treasury securities as a safe and liquid asset, and the fundamental strength of the American economy.
Despite the rebuttals from U.S. officials, Fitch based its downgrade on several key factors. The expected fiscal deterioration over the next few years, coupled with a high and growing general government debt burden, raised concerns about the nation's financial stability. The lack of a medium-term fiscal framework and repeated debt limit standoffs further eroded confidence in fiscal management.
The rating agency also expressed apprehension about the limited progress made in addressing medium-term challenges and the successive increase in debt. These factors contributed to the projected mild recession expected to hit the U.S. economy in late 2023 and early 2024.
However, Fitch acknowledged the U.S.'s continued structural strengths that support its ratings. These include the nation's vast and diverse economy, the status of the U.S. dollar as the world's primary reserve currency, and its positive performance in Environmental, Social, and Governance (ESG) indicators, particularly in political stability, rule of law, and control of corruption.