In a significant development, Fitch Ratings announced on Tuesday that it has downgraded the U.S.’ long-term foreign-currency issuer default rating to “AA+” from “AAA.” This move comes as a blow to the nation’s financial standing and has raised concerns among investors and policymakers alike. The Biden administration has wasted no time in placing blame for this downgrade on former President Donald Trump and the aftermath of the Jan. 6 riots.
According to an administration official speaking to FOX Business, the underlying model for the credit rating was strong until Trump’s administration. However, the model started to dip during the Trump-era, and despite efforts made since 2020, it could not fully recover due to changes in various factors. Fitch has repeatedly cited the Jan. 6 riots as a crucial element in their decision, considering the instability of governance as a contributing factor to the rating downgrade.
Jan. 6 Riots and Erosion of Governance Cited as Factors
The announcement by Fitch Ratings pointed out several reasons behind the downgrade. Among them were the “erosion of governance,” rising deficits, and tightening by the Federal Reserve. These factors combined have led to a precarious fiscal situation in the country. Additionally, Fitch expects the U.S. economy to face challenges, projecting a mild recession in the fourth quarter.
Treasury Secretary Janet Yellen’s Response
In response to Fitch’s move, U.S. Treasury Secretary Janet Yellen issued a statement expressing her disagreement with the decision. Yellen argued that Fitch was using outdated data and not taking into account the improvements made under the Biden administration. She emphasized the progress seen in various indicators related to governance, including bipartisan legislation addressing the debt limit, investments in infrastructure, and other initiatives to enhance America’s competitiveness.
“Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision,” Secretary Yellen stated firmly.
Impact on Borrowing Costs and Investor Sentiment
Credit ratings are essential tools used by investors to assess the risk profile of companies and governments when they seek financing in the debt capital markets. A lower credit rating translates to higher financing costs for the borrower, which could have far-reaching implications for the U.S. economy.
Investors are closely monitoring the situation, given the potential impact on borrowing costs for the U.S. government and businesses. The downgrade may lead to decreased investor confidence and could result in higher interest rates on U.S. government debt, affecting financial markets and overall economic stability.
As the Biden administration grapples with the aftermath of the Jan. 6 riots and continues its efforts to stabilize the economy, the downgrade in the U.S. credit rating adds another layer of complexity to the challenges ahead. While the administration places the blame on the previous administration, it is clear that the path to economic recovery will require bipartisan cooperation and a robust plan to address the underlying issues contributing to the nation’s fiscal deterioration. The financial world is closely watching, hoping for a resolution that will ensure economic stability and sustainable growth for the United States.
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