ISLAMABAD: Fitch’s decision to downgrade the U.S. government’s credit rating evoked an angry response from the White House and caught investors by surprise. This move occurred despite the resolution of the debt ceiling crisis two months ago.
In May, Fitch first indicated the possibility of a downgrade, and in June, it maintained that stance after the resolution of the debt ceiling crisis. The rating agency stated its intention to finalize the review in the third quarter of this year.
Following the downgrade, the United States loses its triple-A rating, making Fitch the second major rating agency to take this action after Standard & Poor’s.
After the announcement, the dollar declined against various currencies, stock futures ticked down, and Treasury futures rose. However, several investors and analysts expect the impact of the downgrade to be limited.
U.S. Treasury Secretary Janet Yellen expressed her disagreement with Fitch’s downgrade, stating that it was “arbitrary and based on outdated data” in a statement.
The White House also shared a similar view, strongly disagreeing with Fitch’s decision. White House press secretary Karine Jean-Pierre emphasized that the downgrade is not reflective of the reality by saying ,“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.”
Analysts pointed out that the downgrade highlights the significant harm caused to the United States by repeated rounds of contentious debate over the debt ceiling, leading the nation to the brink of default in May.
Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA, remarked that the downgrade signals that the U.S. government’s spending is becoming a problem. He said,”This basically tells you the U.S. government’s spending is a problem.”
Impact
In 2011, during a previous debt ceiling crisis, Standard & Poor’s downgraded the top “AAA” rating by one notch a few days after a debt ceiling deal. The reason cited was political polarization and insufficient measures taken to address the nation’s fiscal outlook. The rating was downgraded to “AA-plus,” which is its second-highest rating. Following the downgrade, U.S. stocks experienced a sharp decline, and the impact of the rating cut reverberated across global stock markets, particularly during the euro zone financial meltdown. Interestingly, U.S. Treasuries prices rose due to investors seeking a flight to quality
