Rating agency Fitch Ratings has downgraded US debt from the highest rating of AAA to AA+, citing “a steady deterioration in governance standards.”
The downgrade was issued shortly after financial markets closed for trading earlier today and was criticized by the Treasury Secretary as being ‘arbitrary’.
The move could mean that borrowers are less likely to lend money to the federal government on favorable terms, potentially impacting taxpayers.
In a statement, the rating agency said: “According to Fitch, there has been a steady deterioration in governance standards over the past 20 years.
“Including fiscal and debt issues, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.”
The international credit rating agency, which has offices in London, pictured here, and in New York City has made the move to downgrade the US credit rating
Treasury Secretary Janet L. Yellen, pictured here, responded to the ratings and said she strongly disagreed with the decision
In response, Treasury Secretary Janet L. Yellen said she disagreed with Fitch’s downgrade, in a statement calling it “arbitrary and based on outdated data.”
Yellen said: “The change announced today by Fitch Ratings is arbitrary and based on outdated data.
“Fitch’s quantitative assessment model dropped significantly from 2018 to 2020 – and yet Fitch is now announcing its change despite the progress we’re seeing in many of the indicators Fitch relies on to make its decision.”
Earlier, a senior Biden administration official told reporters that the Fitch Ratings decision was “bizarre and baseless.”
Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services said: ‘This was unexpected, it came out of left field a little bit.
“As for the impact on the market, it is uncertain at the moment. The market is at a point where it’s somewhat vulnerable to bad news.”
At present, US debt has passed $31 trillion and is expected to approach levels as a share of the total economy that it has not reached since the end of World War II.
The downgrade was issued by the company shortly after financial markets closed trading earlier today
Jason Furman, an Obama administration economist and a professor at Harvard University downplayed the downgrade.
He told the Washington Post: “Investors in US Treasurys are much more sophisticated than the evaluators at Fitch.
“This will be the same – more of a political football than anything economically relevant.”
In May, Fitch had put his “AAA” rating of US government debt on hold for a possible downgrade, citing downside risks including political weakness and a growing debt burden.
The dollar ticked lower on news of the downgrade, which came two months after President Biden and the Republican-controlled House of Representatives reached a debt ceiling deal.
The House of Representatives and Senate passed the legislation in June after Biden and House Speaker Kevin McCarthy reached an agreement after months of tense negotiations.
At the time the legislation was passed, the Treasury Department had warned that they wouldn’t be able to pay all the bills if Congress didn’t act.
The White House released a 10-second video clip of Biden signing the bill in the Oval Office, but chose to avoid the kind of public ceremony that often accompanies the signing of hard-won measures.
The White House released a 10-second video clip of Biden signing the bill in the Oval Office, but chose to avoid the kind of public ceremony that often accompanies major measures
House Speaker Kevin McCarthy told his caucus that Republicans were able to achieve a rare cut in government spending while suspending the debt ceiling until January 2025
At the time the legislation was passed, the Treasury Department had warned that they wouldn’t be able to pay all the bills if Congress didn’t act.
The White House released a 10-second video clip of Biden signing the bill in the Oval Office, but chose to avoid the kind of public ceremony that often accompanies the signing of hard-won measures.
Republicans had refused to raise the country’s borrowing limit unless Democrats agreed to cut spending, leading to a deadlock that was only resolved after weeks of intense negotiations between the White House and McCarthy.
The final deal suspends the debt limit until 2025 – after the next presidential election – and limits government spending.
It gives lawmakers budget targets for the next two years in hopes of ensuring fiscal stability as the political season heats up.
Raising the country’s debt limit, now at $31.4 trillion, will allow the government to borrow to pay off debts already incurred.