U.S. Credit Rating Downgrade Shocks the Market
Rating agency Fitch delivered a jolt to the financial markets on Tuesday by downgrading the U.S. government's top-tier credit rating. This came as a surprise for investors and sparked an angry rebuttal from the White House, especially given it occurred two months after the resolution of the debt ceiling crisis.
Market Response: A Flight to Safety
Traders reacted quickly to the news, initiating a risk-averse shift from stocks to perceived safer assets like government bonds and the dollar.
Fitch's Justification for the Downgrade
Fitch lowered the U.S. credit rating from AAA to AA+, citing anticipated fiscal deterioration over the next three years and consistent last-minute debt ceiling negotiations that put the government's bill-paying capacity at risk. The warning signs were there, with Fitch first hinting at a possible downgrade in May and reaffirming that stance in June, even after the debt ceiling crisis was resolved.
The U.S. Loses its Triple-A Rating: A Second Blow
With Fitch's downgrade, the United States loses its coveted triple-A rating from a second major rating agency, following a similar move by Standard & Poor's.
A Glimmer of Hope: Bipartisan Debt Ceiling Agreement
This downgrade came in the wake of a debt ceiling agreement reached by Democratic President Joe Biden and the Republican-controlled House of Representatives two months prior. This deal increased the government's borrowing limit to $31.4 trillion, effectively putting an end to months of political stalemate.
Fitch Cites Governance Deterioration
Fitch's downgrade is also underscored by what the rating agency views as a steady decrease in governance standards over the past two decades, particularly concerning fiscal and debt issues. This observation stands even after the bipartisan agreement in June to suspend the debt limit until January 2025.
White House and U.S. Treasury Object to Downgrade
The U.S. Treasury Secretary, Janet Yellen, expressed disagreement with Fitch's decision, labeling it as "arbitrary and based on outdated data". The White House echoed this sentiment, openly opposing the decision. White House press secretary Karine Jean-Pierre refuted the downgrade, arguing it contradicts the fact that President Biden has fostered the strongest recovery of any major global economy.
