The US government’s credit rating has been downgraded following concerns over the state of the country’s finances and its debt burden.
Fitch, one of three major independent agencies that assess creditworthiness, downgraded it from the top rating of AAA to AA+.
Fitch said it had noted a “steady deterioration” in governance over the last 20 years.
Treasury Secretary Janet Yellen called the downgrade “arbitrary”.
It was based on “outdated data” from the period 2018 to 2020, she said.
Investors use credit ratings as a benchmark for judging how risky it is to lend money to a government. The US is usually considered a highly secure investment because of the size and relative stability of the economy.
However, this year saw another round of political brinkmanship over government borrowing.
In June the government succeeded in lifting the debt ceiling to $31.4 trillion (£24.6 trillion) but only after a drawn-out political battle, which threatened to push the country into defaulting on its debts.
When Congress returns from its summer recess, lawmakers will have to work to reach an agreement on next year’s budget before 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, said Fitch in a statement.
“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,” the rating agency said.
Ms Yellen said she “strongly” disagreed with Fitch’s decision.
“Treasury securities remain the world’s preeminent safe and liquid asset, and… the American economy is fundamentally strong,” she said in a statement.
The timing and rationale behind the downgrade has taken many economists by surprise.
Former US Treasury Secretary Larry Summers said Fitch’s decision is “bizarre and inept,” particularly as the US economy “looks stronger than expected,” he said in a post on Twitter, now known as X.
Mohamed El-Erian, the chief economic adviser at financial services giant Allianz, said 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 the Threads social media platform.
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”.
Alec Phillips, the chief US political economist at Wall Street bank Goldman Sachs said: “The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information,” .
The move “should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change,” he added.
Others questioning the timing of the Fitch announcement included Jason Furman, who was an economic adviser to former US president Barack Obama. He called it “completely absurd.”
Source : BBC