In a controversial move that sparked immediate backlash from the White House and U.S. Treasury Secretary Janet Yellen, Fitch Ratings lowered the United States’ debt rating from AAA to AA+ on Tuesday.
The downgrade, which officials are labeling as “bizarre and baseless,” has opened up a fresh debate on the fiscal policies, governance standards, and the underlying reasons for this unexpected decision by one of the largest credit rating agencies in the U.S.
Fitch’s justification
The rating downgrade by Fitch reflects a grim forecast of fiscal deterioration over the coming three years. Citing a “high and growing general government debt burden,” Fitch expressed its concerns over the erosion of governance standards, particularly in relation to debt limit standoffs and last-minute resolutions.
These governmental challenges have been a recurring theme over the last two decades. According to Fitch, the political quagmires surrounding the debt ceiling and the eleventh-hour solutions have severely undermined confidence in fiscal management.
The agency highlights a consistent decline in governance standards over the last 20 years. They also expect the general government deficit to rise to 6.3% of GDP in 2023, up from 3.7% in 2022.
This prediction takes into account weaker federal revenues, new spending initiatives, and an increased interest burden.
Despite the previous negative watch placed on the country’s credit rating due to the debt ceiling fight in Washington, Fitch has now removed that designation, assigning a “stable outlook.”
A strong rebuttal from the White House and Yellen
The downgrade has not gone unnoticed or unchallenged. White House officials, including President Biden’s administration, have vehemently disagreed with the downgrade decision.
The governance issues, they argue, were a product of former President Trump’s administration, making Fitch’s current move both untimely and unfounded.
White House Press Secretary Karine Jean-Pierre openly expressed the administration’s disapproval, pointing out that the rating model used by Fitch had declined under President Trump but improved under President Biden.
The downgrade is seen as an irrational action, especially at a time when the U.S. is demonstrating the strongest economic recovery among major world economies.
Treasury Secretary Janet Yellen’s response was equally stern. Describing the change as “arbitrary and based on outdated data,” Yellen challenged Fitch’s rationale, emphasizing that many of the indicators Fitch relies on have shown significant improvements during the current administration.
She alluded to the passage of bipartisan legislation addressing the debt limit, infrastructure investment, and other competitive enhancements as key indicators of progress.
The White House’s vocal dissatisfaction with Fitch’s decision marks a new chapter in the ongoing dialogue about the nation’s fiscal responsibility, governance, and the credibility of rating agencies.
As the reactions continue to pour in, it’s evident that this is more than a mere downgrade in numbers. It’s a statement that has resonated deeply with a government that is determined to shape a robust economic recovery.
Both the White House and Treasury Secretary Yellen’s unwavering stance against the downgrade not only challenges the validity of Fitch’s decision but also underscores a profound disconnect between the rating agency’s view and the administration’s understanding of the nation’s fiscal and governance health.
