Fitch Downgrades US Credit Rating, Warns of Mild Recession

Credit agency Fitch has downgraded the US government’s credit rating following what it called a “steady deterioration” in governance over the last twenty years.

Fitch, one of three major independent agencies that assess creditworthiness, cut the rating from the top level of AAA to a notch lower at AA+ following concerns over the state of the country’s finances and its debt burden.

“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” relative to peers, said Fitch in a statement.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said.

“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.

“Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population,” Fitch says.

Fitch also said it expects the US to slip into a mild recession later this year.

US dismisses credit rating downgrade

US Treasury Secretary Janet Yellen called the downgrade “arbitrary.” It was based on “outdated data” from the period 2018 to 2020, she said.

“Treasury securities remain the world’s preeminent safe and liquid asset, and… the American economy is fundamentally strong,” she said in a statement.

The timing and rationale behind the downgrade has taken many economists by surprise.

Former US Treasury Secretary Larry Summers said Fitch’s decision is “bizarre and inept,” particularly as the US economy “looks stronger than expected,” he said in a post on Twitter, now known as X.

Mohamed El-Erian, the chief economic adviser at financial services giant Allianz, said the Fitch announcement was “a strange move.”

“This announcement is more likely to be dismissed than have a lasting disruptive impact on the US economy and markets,” he posted on the Threads social media platform.

Nobel Prize-winning economist Paul Krugman said that “the biggest economic news over the past year has been America’s remarkable success at getting inflation down without a recession.”