What Does The United States’ Credit Downgrade Mean?

Is Washington, D.C. broken?

The global rating agency, Fitch, certainly believes so. On Aug. 1, the company downgraded the credit of the United States one notch, from AAA to AA+. It is only the second time in history that our nation’s credit has been downgraded, the first in August 2011 by S&P. In its explanation, Fitch stated that the downgrade “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 AA- and AAA-rated peers over the last two decades that has manifested in repeated debt-limit standoffs and last-minute resolutions.”

The move came as a surprise despite the agency hinting in May that the inability of Congress to effectively deal with the debt ceiling could lead to a downgrade. Once legislation was passed to raise the U.S. government debt limit, Fitch Ratings said the United States’ AAA credit rating would remain on negative watch. President Biden, Treasury Secretary Janet Yellen, and others in the administration have criticized the move as bizarre and arbitrary, careful to point out that the timing made no sense given the bipartisan effort to avoid a default in June.

The reaction by financial markets was somewhat mild considering the nearly unprecedented — and alarming — nature of the downgrade by Fitch. Bond prices went lower as yields continued higher, and the S&P 500 sold off about 1.3% — overall, a negative response. But 2023 has been a healthy year for investors thus far, with stocks up nearly 20% prior to the Fitch downgrade and a bond market about flat on the year, a stark contrast to 2022, when both markets were down double digits, an historical anomaly. So, what is the impact of a AA+ versus AAA rating for our government’s debt?

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Thursday, August 10, 2023 in BusinessWest.com