Fitch Downgrades US Credit Rating
On August 1, 2023, Fitch Ratings, one of the world’s leading credit rating agencies, downgraded the United States’ credit rating from AAA to AA+. This move echoes the 2011 decision by Standard & Poor’s (S&P) to downgrade the US credit rating from AAA to AA+.
Fitch’s Rationale
Fitch cited the US government’s “persistent and material deterioration in the government’s budget profile” as the primary reason for the downgrade. The agency noted that the US government’s debt-to-GDP ratio had risen from 77% in 2019 to 105% in 2023, and that the government’s debt burden was expected to remain above 100% of GDP for the foreseeable future.
Fitch also noted that the US government’s fiscal position had been weakened by the economic fallout from the COVID-19 pandemic. The agency noted that the US government had responded to the pandemic with a series of fiscal stimulus measures, including direct payments to individuals and businesses, which had increased the government’s debt burden.
Implications of the Downgrade
The downgrade of the US credit rating has several implications. First, it could lead to higher borrowing costs for the US government. As the US government’s credit rating is downgraded, investors may demand higher interest rates on US government bonds, which could lead to higher borrowing costs for the US government.
Second, the downgrade could lead to higher borrowing costs for US businesses and consumers. As the US government’s credit rating is downgraded, investors may demand higher interest rates on corporate bonds and other forms of debt, which could lead to higher borrowing costs for US businesses and consumers.
Third, the downgrade could lead to a weaker US dollar. As the US government’s credit rating is downgraded, investors may be less likely to invest in US assets, which could lead to a weaker US dollar.
Finally, the downgrade could lead to a weaker US economy. As the US government’s credit rating is downgraded, investors may be less likely to invest in US assets, which could lead to a weaker US economy.
Reaction to the Downgrade
The downgrade of the US credit rating has been met with criticism from both sides of the political aisle. Democrats have criticized the Trump administration for its handling of the COVID-19 pandemic, arguing that the government’s fiscal stimulus measures have increased the government’s debt burden and led to the downgrade.
Republicans, meanwhile, have argued that the downgrade is a result of the government’s failure to address the nation’s long-term fiscal challenges, such as entitlement spending and the national debt.
Outlook
It remains to be seen how the downgrade of the US credit rating will affect the US economy in the long term. In the short term, the downgrade could lead to higher borrowing costs for the US government, businesses, and consumers, as well as a weaker US dollar and a weaker US economy.
In the long term, the downgrade could lead to a weaker US economy if the government fails to address the nation’s long-term fiscal challenges. It is also possible that the downgrade could lead to a stronger US economy if the government is able to address the nation’s long-term fiscal challenges and restore investor confidence in the US economy.
Only time will tell how the downgrade of the US credit rating will affect the US economy in the long term.