In a move that has raised eyebrows on Wall Street and beyond, Fitch Ratings has lowered the United States’ long-term foreign-currency issuer default rating from the pristine AAA to the less lustrous AA+. They are citing what could be construed as a fiscal version of ‘too much drama,’ the decision points to recurring political disputes over the debt ceiling and anticipated fiscal deterioration in the next few years.
What’s Ruffling Fitch’s Feathers?
Fitch Ratings, known for its straight-shooting assessments, has spotlighted the U.S.’s debt ceiling problem since May. The agency pointed to “repeated debt-limit political standoffs and last-minute resolutions” that have chipped away at confidence in fiscal management. The turbulent tango between lawmakers almost left Uncle Sam running on fumes, finally saw President Joe Biden signing off on the debt ceiling bill just days shy of the ‘X-date’ on June 5.
What Lies Ahead for Uncle Sam?
Fitch’s downgrade, however, continues to bear the brunt of the past disputes. The rating agency sees a continuous “deterioration in governance standards over the last 20 years,” especially concerning fiscal and debt matters. They also cited the growing general government deficit, projected to leap to 6.3% of the GDP in 2023, up from 3.7% in 2022. Fitch offered a somewhat lukewarm acknowledgment of the cuts to non-defense discretionary spending (15% of total federal spending) under the Fiscal Responsibility Act as offering “only a modest improvement to the medium-term fiscal outlook.”
Fitch isn’t ruling out the possibility of a “mild” recession in the last quarter of 2023 and the first quarter of the following year. This recession could be triggered by a perfect storm of tightening credit conditions, dwindling business investment, and a slowdown in consumption.
The White House Begs to Differ
The White House has a bone to pick with Fitch’s downgrade. Press secretary Karine Jean-Pierre fired back, arguing that the downgrade “defies reality” considering President Biden’s role in facilitating what she describes as the “strongest recovery of any major economy in the world.”
This isn’t the first rodeo for the U.S., as it faced a similar downgrade by Standard & Poor’s in 2011. While the downgrade adds a dollop of uncertainty to the financial landscape, it also offers a chance to confront issues head-on. As the dust settles from this decision, the focus must be on maintaining the fiscal discipline and economic resilience that have traditionally been the hallmark of the U.S. economy. Stay tuned for more economic plot twists in this financial drama!
