Fitch Ratings, one of the 'Big Three' American credit rating agencies, cut the US government's rating from the top level of AAA to a notch lower at AA+. This follows after arising concerns over the state of the country's finances and its debt burden.
Fitch said it noted a "steady deterioration" in governance over the last 20 years. US Treasury Secretary Janet Yellen retaliated calling the downgrade "arbitrary" as it was based on "outdated data" from 2018 to 2020.
Investors use credit rating to gauge the risk of lending money to the government. The US has always been considered a highly secure investment due to the size and relative stability of its economy.
However, this year saw another political brinkmanship over government borrowing. In June, the government lifted the debt ceiling to US$31.4 trillion but this was only after an extended political battle which threatened to push the country into defaulting on its own debts. Meanwhile, lawmakers would have to reach an agreement on next year's budget by the end of September to prevent a government shutdown.
"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to peers. In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," said the rating agency.
Yellen said that she "strongly" disagreed with Fitch's decision. In her statement, she emphasised:
"Treasury securities remain the world's preeminent safe and liquid asset, and... the American economy is fundamentally strong,"
The timing and rationale behind the downgrade has taken many economists by surprise.
Former US Treasury Secretary Larry Summers Tweeted that Fitch's decision was "bizarre and inept" especially as the US economy "looks stronger than expected" on X.
Mohamad El-Erian, the chief economic adviser at financial services giant Allianz, echoed the sentiment that the Fitch announcement was a "strange move".
"This announcement is more likely to be dismissed than have a lasting disruptive impact on the US economy and markets," he posted on Threads.
Fitch also said it expects the US to slip into a mild recession later this year. However, Nobel Prize-winning economist Paul Krugman said:
"The biggest economic news over the past year has been America's remarkable success at getting inflation down without a recession".