Fitch downgraded the U.S. from a rating of “AAA” to “AA+” after several years of high-risk partisan battles over the debt limit. Those battles, Fitch said, have led to a spiraling national debt and a lack of faith in the U.S. government to handle it.
“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,” Fitch wrote.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
Fitch’s downgrade comes roughly three months after President Biden signed a deal to raise the debt limit just days before the U.S. was expected to default on the national debt.
Fitch warned then that the growing debt — now well over $32 trillion — and Congress’s inability to manage it in a productive and responsible way posed threats to the country’s creditworthiness.
“The government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade,” Fitch said Tuesday.
“Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”
Fitch also cited “increased political polarization and partisanship as witnessed by the contested 2020 election” in its June warning. The agency released its Tuesday downgrade within moments of former President Trump’s indictment for his conduct on and leading up to Jan. 6, 2021.
The downgrade is an embarassing blow for the U.S. government, which had long been considered one of the safest borrowers in global finance.
Trillions of U.S. dollars and Treasury bonds lay the foundation for the U.S. financial system. That has allowed the federal government to rack up limitless debt without economic blowback.
While the rating’s downgrade may have a largely symbolic impact, it comes as the U.S. and other major powers face rising interest rates.
The Federal Reserve has boosted its baseline interest rate by 5.5 percentage points since March 2022 as the central bank battled inflation. A lower credit rating may push U.S. interest rates even higher, though global market conditions could dampen the full impact.
The timing of the downgrade, however, did raise eyebrows among some economists.
“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” posted former Treasury Secretary Larry Summers on X, the platform formerly known as Twitter.